This article first appeared in The Edge Financial Daily, on May 3, 2016.

Eco World Development Group Bhd
(April 29, RM1.29)
Maintain “buy” with a lower target price (TP) of RM1.72: Eco World Development Group Bhd (EcoWorld) has proposed to undertake a private placement of 591.1 million shares, representing 25% of the existing shares. The placement will be done in tranches with the first tranche of 449.2 million shares (76% of the total placement) placed to major shareholders of EcoWorld (Liew Tian Xiong and Sinarmas Harta Sdn Bhd). The subsequent tranches for the remaining 141.8 million shares will be determined later.

Assuming the same placement price of RM1.30 for all tranches, EcoWorld is expected to raise up to RM768.4 million. Out of this, RM468 million (61% of gross proceeds) is targeted for the subscription of EcoWorld International Bhd’s (EWI) initial public offering (IPO). This is followed by RM297.7 million (or 39%) for future land acquisitions. 

The rationale for the private placement is to accelerate EcoWorld’s entry into overseas markets via EWI’s IPO in a significant manner without an excessive strain on its financial resources. Note that EWI’s property projects in London and Sydney had collectively secured cumulative sales of £712.5 million as of Jan 31, 2016.

We are neutral on the news but, on the positive side, EcoWorld’s gross gearing will be reduced to 0.43 times (from 0.54 times as at the end of financial year 2015 [FY15]). However, the dilution for FY16 and FY17’s earnings per share (EPS) is expected to be at 6% and 20%. We are also expecting its fully diluted revised net asset value (RNAV) per share to be reduced by 8% to RM2.30 due to the effect of the higher share base. We maintain our core net income estimates of RM125 million/RM229 million for FY16/FY17 as the private placement is not expected to affect near-term earnings. However, FY16/FY17 EPS is lowered by 6%/20% to 4.97 sen/7.73 sen after taking into account the higher share base.

Our TP has been lowered by 8% to RM1.72 in line with the reduction in the fully diluted RNAV. 

Its valuation method is unchanged by using the price-to-RNAV of 0.75 times, reflecting a 0.5 standard deviation valuation above mean. Despite the reduction in our TP, we maintain our “buy” call due to EcoWorld’s leadership in securing property sales, superior earnings growth prospects and strong branding. The catalyst for the stock will be the successful achievement of sales target and earnings delivery. — MIDF Research, April 29