This article first appeared in The Edge Financial Daily on December 18, 2019
Eco World Development Group Bhd
(Dec 17, 74.5 sen)
Maintain buy with an unchanged target price (TP) of RM1.02: Eco World Development Group Bhd (EcoWorld) announced that its subsidiary Melia Spring Sdn Bhd had entered into an agreement with Permodalan Darul Taz’zim Sdn Bhd (PDT) to acquire and develop 200 acres of land in Johor for a base land price of RM304.9 million. The proposed land acquisition is expected to be completed by end-2020.
We viewed the land acquisition positively as it is in line with EcoWorld’s recently announced plans to offer homes with good amenities at affordable prices. The 200-acre land is located next to EcoWorld’s existing project Eco Botanic in Johor. EcoWorld plans to develop the parcel into a mixed residential and commercial township with an estimated gross development value (GDV) of RM1.67 billion, with a large component comprising affordable products for first-time homebuyers and the targeted middle 40% income group. The proposed development is expected to increase Eco Botanic’s population base and vibrancy. The land cost to GDV of 18% is also decent.
The land acquisition’s impact on the balance sheet is expected to be minimal due to staggered payment terms. RM6 million — a 1% deposit and a 1% base price — is to be paid within three months, and the remaining purchase consideration of RM299 million over seven years, allowing EcoWorld to better manage its cash flow. Meanwhile, the near-term earnings impact is expected to be minimal as the project’s launch is expected in 2021. Take note that a 20% profit from the project will be shared with PDT.
Our earnings forecasts for financial year 2020 (FY20) and FY21 are unchanged. Our TP of RM1.02 — premised on our revalued net asset value discount of 55% — is maintained, pending further information on the project development timeline for the parcel. Our “buy” recommendation on EcoWorld is maintained due to its attractive valuation and stable earnings outlook. — MIDF Research, Dec 17