Kenanga Research downgraded its call to UNDERPERFORM from MARKET PERFORM as the recent price rally could have been overdone despite Eco World Development Group Bhd’s (Eco World) strong branding and dividend yield proposition.
However, the research house is positive on the group’s proposed acquisition of land in Pulai, Johor Bahru for development as it received strong reception for its neighbouring township, Eco Botanic and Eco Botanic 2.
“As per the group’s financial year ended Oct 31, 2023 (FY23) reporting, Eco Botanic and Eco Botanic 2 enjoyed a collective take-up rate of 86%, indicating a strong reception for its products within the Pulai region.
“The deal will be funded by internal funds over a 5-year instalment period, which will not overly stretch the group’s gearing.
“That said, assuming if the group is to undertake a lumpsum payment, net gearing would remain within manageable levels at 0.33x from 0.24x,” it said in its Company Update today (Jan 19).
Kenanga maintained its forecast pending completion of the development deal for the land. It also retained its TP of RM1 with an unchanged 50% discount to revised net asset value (RNAV), compared to an average of 55% for its peers.
“Assuming its completion, the acquisition would increase our total RNAV per share to RM2.06 from RM2, hence increasing our TP to RM1.03.
“We had pegged a lower discount to Eco World as the group continues to see favourable take-ups for its launches across various segments. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us,” it said.
Eco World yesterday announced a proposed acquisition of 13 parcels of freehold land amounting to 240.3 acres in Mukim Pulai, Johor Bahru for RM450.1 million or RM43 per square feet.
“The acquisition is tied with a conditional development agreement with Permodalan Darul Ta’zim Sdn Bhd (PDT), a state-owned investment holding company which will facilitate in applying and obtaining the necessary development approvals for the land’s development.
“Tentative plans include the development of a mixed residential (consisting of affordable high-rise and landed homes) and commercial township with a preliminary GDV of RM3.88 billion,” Kenanga said.
The launch date of the development has yet to be announced, subject to the completion of the acquisition by 2024.
It added that the price tag of the land at 43 per square feet carries a premium compared to adjacent Eco Botanic and Eco Botanic 2’s land, with the latter being purchased at RM35 per sq ft, also with a deal with PDT in Dec 2019.
“We opine that this could be due to the established maturity of Eco Botanic and Eco Botanic 2’s townships which have uplifted the land value within that area.
“Access to the already developed commercial area may further bolster the desirability on nearby developments, warranting the premium,” it added.
The research house likes Eco World for its strong branding, strong resale value, and well-received contemporary designs, strong responsiveness to cater to market conditions and timely presence to tap into Johor’s booming industrial scene.
“There is a good chance for a special dividend. We project to the tune of 7 sen per share assuming a 60% payout) following a lumpy dividend of RM214 million from Eco World International Bhd.
“However, these merits could already be priced in following the rally in the past few months, unfavourably skewing its risk-to-reward. Hence, we downgrade to UNDERPERFORM from MARKET PERFORM.”
The risks to Kenanga’s call include a strong upturn in the local property market, more favourable mortgage rates, improving affordability, lower construction cost, and risks associated with overseas operations.
