Eco World still a ‘buy’, target price lowered

PETALING JAYA: MIDF Research has maintained its “buy” call on Eco World Development Group Bhd, with a lower target price of RM1.62 (from RM1.72), following the rescission of the group’s land purchase in Batu Kawan, Penang.
On Wednesday, Eco World announced that Penang Development Corp (PDC) rescinded the award of a 449.64ha land in Bandar Cassia, Batu Kawan to the group, after extensive studies found that the golf course project would need additional acreage, thus impacting the viability of the project.
In a report yesterday, MIDF Research analyst Alan Lim said the group’s revalued net asset valuation (RNAV) value will be reduced by 6% to RM2.16 per share (from RM2.30), where total gross development value will decline by RM10 billion or 13% to RM64.96 billion.
“We have reduced our target price to RM1.62 after removing the Batu Kawan land from our RNAV,” he added, noting the valuation method is unchanged by using price-to-RNAV of 0.75 times reflecting 0.5SD valuation above mean.
However, despite the reduction in its target price, Lim said the research house maintained its “buy” call due to the group’s leadership in securing property sales, superior earnings growth prospects and strong branding.
On the other hand, Lim said the rescission will also lighten the group’s near term capital commitment and reduce the pressure on its balance sheet.
“Our estimate shows that end-FY16 net gearing is likely to be reduced to 0.52 times (from earlier estimate of 0.60 times),” he said.
Lim noted that the 150 acres of golf course development and 299.64 acres of mixed development project value was RM781.25 million.

Eco World has previously paid RM156.25 million (20% deposit) to PDC and will make an announcement in due course after both parties entered into a deed of rescission to give effect to the rescission.
On sales and earnings forecast, Lim said MIDF Research FY16 sales target of RM3.5 billion (which is more conservative than management target of RM4 billion) is maintained as the Batu Kawan land is not targeted for FY16 launch.
“We also maintain our core earnings estimates for both FY16 and FY17,” he added.