By Khairie Hisyam
Entering its third straight day of heavy losses today, property developer Eco World Development Group Bhd share price is likely to drop even further after the dust fully settles following its proposed corporate exercises announced last Friday.
At the 5pm bell today, Eco World was traded at RM4.56 per share, having lost ground by 29 sen since the morning bell. This erases the counter’s gains of some 15% since the month began and then some — it closed at RM4.69 on April 1.
In a report following last Friday’s announcement, Kenanga Research estimated Eco World’s shares to trade at RM1.79 after the proposed share split, share subscription, private placement and rights issue are completed, a two-thirds reduction from its price of RM5.35 when the announcement was made.
At its target ex-all price (TEAP) of RM1.79 per share, Kenanga expects potential upside of 27%, setting a fair value target of RM2.27.
“Assuming the group fully utilises its placement funds and increases its net gearing to 0.3x, this could increase its GDV by another RM14b,” said Kenanga. “If so, Eco World’s ex-all fair value would increase to RM2.51.”
However Kenanga’s ex-all valuation was based on Eco World’s last traded price prior to the announcement which stood at RM5.35 compared to today’s closing price of RM4.56 — a 79 sen or 14.7% difference.
The counter’s sharp drop this week has continued despite news that SP Setia president and chief executive officer Liew Kee Sin — serving his last day in office this week — is set to join Eco World’s board next Tuesday.
Bright prospects post-exercise
When the proposed corporate exercises are done, Eco World is set to aggressively expand its land bank and gross development value (GDV) even further, said Kenanga.
To recap, last Friday Eco World announced among others an assets injection exercise by major shareholder Eco World Development Sdn Bhd (EWDSB) that more than triples Eco World’s land bank to 4,433 acres and boosting its total gross development value (GDV) to RM43.53 billion.
Prior to the exercise, Eco World’s land bank totalled 1,325 acres with GDV of RM13.49 billion. Encouragingly the developer looks set to expand its landbank even further with a strong cash position after the corporate exercises complete.
“Post the corporate exercises (before warrants conversion), the group will be in a net cash position of 0.25x with a cash pile of (around) RM1 billion,” said Kenanga. “Assuming that EcoWorld can gear up to 0.3x net gearing level, which is extremely comfortable for most developers, the group can afford to borrow another RM1.7 billion for land-banking.”
The research house added that assuming land cost is around 12% of GDV, Eco World may well end up with another RM14 billion in GDV in this scenario. “We do expect the group to continue land banking aggressively.”
In terms of market capitalisation, the full completion of all proposed exercises — assuming all warrants are exercised — would see Eco World’s net assets grow to RM4.14 billion with a market capitalisation of RM5.17 billion based on the RM1.79 price assumption.
That takes Eco World past Mah Sing Group Bhd whose current market cap stands at RM3.25 billion.
“Estimated market cap of RM4.23 billion post-corporate exercise (before warrants conversion), making it the fifth largest developer under our coverage,” said Kenanga. “EcoWorld’s GDV/market cap ratio of 10x is more compelling against its peer (developers above RM3 billion market cap) average of 8.3x.”
“Assuming a 15%-20% year-on-year (y-o-y) growth in sales, we estimate that its group’s GDV will provide up to seven to nine years (of) earnings visibility,” added Kenanga.
The research house projects Eco World’s FY14 earnings to hit RM52 million, expecting that number to rise to RM203 million for FY15 and hit RM497 million in FY16 based on sales of RM2 billion, RM3 billion and RM3.5 billion respectively.
“Since FY14E earnings may not be representative, we look towards FY15E PER of 20.8x which is still at a significant premium to its peer’s average of 11.7x,” added Kenanga.
Premium from SP Setia genetics
Eco World would likely command a premium due to its management’s background, said Kenanga Research, especially if Liew takes charge of the fast-emerging developer.
“We believe investors will be pleased to see Liew in Eco World and expect him to replicate SP Setia’s business model closely, implying that the stock could be trading at premium valuations against its peers,” said the research house. .” “Additionally, the group’s earnings growth rate will be much stronger, given its low base effect, which would warrant a higher PER, especially when FY16E PER is lowered to 8.5x.”
Formerly a little-known developer called Focal Aims Holdings Berhad, Eco World was the subject of a reverse take-over by EWDSB (formerly known as Maple Quay Sdn. Bhd) and Liew’s son Tian Xiong last September in a deal worth RM230.7 million.
After the takeover was completed, Focal Aims was renamed as Eco World Development Group with a new board comprising former SP Setia strongmen. Notably, Liew Tian Xiong’s part in the take-over was financed by his father Liew Kee Sin, who is departing developer SP Setia at the end of this month after 18 years in the hotseat.
This sparked talk of whether the elder Liew is conflicted between his position at the helm of SP Setia and his part in Eco World’s manoeuvres, especially given market speculation that Eco World is Liew’s personal vehicle as a fresh start after leaving SP Setia.
However, when pressed by KiniBiz in September Liew said: “I want to retire, enough of work!”
KiniBiz previously examined Eco World’s rapid emergence in a three-part series here.
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