HIGHLIGHTS
- Effective target marketing strategies led to steady sales performance - Average take-up rate stood at 84% as of April 2022.
- Sizeable landbank within key populous areas deemed supportive of growth prospects.
- Improved capital structure through steady deleveraging efforts.
- We prefer the 5-year bond offering (ECOWMK Oct2027 Corp (MYR)), considering the current inflationary environment. Its higher return compared to other similar-featured bonds available in the market adds value to the investment.
BUSINESS OVERVIEW
Effective target marketing strategies
At the beginning of its operation in 2013, EcoWorld’s townships and industrial developments largely carry between RM500,000 and RM800,000 price tag, reflecting its targeted market of the middle-to-upper income group. However, at present, efforts to widen the range of product offerings at all price points are ongoing. While this has resulted in accumulation of higher pricing power as its operation matures, this has also significantly increased the diversity of its customer base and helped to sustained sales and overall economic performance. As of April 2022, average take-up rate stood at a strong 84%. As such, we opine that EcoWorld’s marketing strategy has been effective in navigating through the challenging property outlook.
(Full article on Malaysia's Property Outlook 2022 can be found here.)
(Full article on Malaysia's Property Outlook 2022 can be found here.)
Chart 1: Sales by property type in FY2021
Source: EcoWorld
New revenue and value-producing opportunities through digitalization
EcoWorld’s sales in FY2021 of RM2.04 billion was supported by the integration of digital framework into its work processes. Introduced in 2017, the systematic and comprehensive digitalisation of both frontline and support functions over the years have resulted in significantly increased lead generation, faster sales conversion and highly efficient billing processes enabling accelerated cash recovery from sales whilst reducing overhead costs.
Sizeable landbank supportive of growth prospects
FINANCIAL PERFORMANCE
Table 2: Landbank status as at end-August 2022
| Region | Total landbank | Remaining landbank | Remaining landbank (%) |
| Klang Valley | 4,735.3 | 2,097.0 | 56% |
| Johor | 3,119.1 | 1,394.0 | 37% |
| Penang | 463.9 | 239.0 | 6% |
| Total | 8,318.3 | 3,730.0 | 100% |
Source: EcoWorld
As of August 2022, the group has about 3,730 acres of undeveloped landbank with gross development value of RM57.1 billion. About 56% of the remaining land parcel size are located at the central region, of which has a consistent track record of strong sales volume. The rank is followed by 37% (1,294 acres) in Johor and 6% (463.9 acres) in Penang. Disaggregating revenue by geographical market, of RM2.04 billion sales in FY2021, the bulk of it came from Johor and Klang Valley projects contributing about 48% and 44%, followed by Penang projects of 8%. Considering these, we think that EcoWorld’s growth prospects would remain supportive going forward.
International projects undertaken by joint venture, ECWI
EcoWorld has minimal direct exposure to overseas property projects which are located in the United Kingdom and Australia. These projects are undertaken by its 27%-held joint venture with Eco World International (ECWI), of which are relatively matured and in cash generation mode. Over the past three financial years (FY2019 – FY2021), EcoWorld recorded share of profits averaging RM47 million p.a. from ECWI. Up to end-August 2022, ECWI recorded sales of around RM1.7 billion (FY2021: RM1.4 billion), showing a broad recovery in its financial profile.
For FY2022, however, ECWI recorded losses due to lower revenue and profit contribution mainly from its Australian projects. Notwithstanding the share of EcoWorld International’s loss, the Group was still able to achieve a higher PBT 3QFY2022 mainly due to the improved performance of its Malaysian projects and savings in administrative expenses, as well as finance costs following the ongoing repayments of borrowings during the financial period. As at July 2022, ECWI’s net gearing also remains low at 0.07x. It also has unbilled sales standing at RM1.1 billion as of May 31, 2022.
FINANCIAL PERFORMANCE
Profitability
Table 3: Selected profitability indicators (RM million)
Lower operating margin compared to peers
Despite the higher operating margin performance discussed above, its performance has been comparatively lower than most of its peers as the group had to acquire most of its landbank during the peak of the property cycle in 2014-2015. Additionally, the group incurred additional costs to build structural and aesthetic features for its projects, which have weighed on its profit margins.
Going forward, such additional costs are deemed minimal as its townships have matured with core infrastructure and amenities built in place. In the longer term, the existence of these lifestyle-enhancing features can enable the group to launch higher-margin developments in subsequent phases.
Capital structure
Table 5: Capital structure indicators (RM million)
Source: EcoWorld; DE - Debt-to-equity
Total borrowings declined to RM2.6 billion as at end-July 2022 from RM3.8 billion in FY2018 as borrowings were pared down through internal cash generation. This, together with the increase in shareholders’ equity, has resulted in DE ratio trending down to 0.55x from 0.89x in FY2018. The healthier capital structure thus provides headroom for funding activities, if needed. Assuming an initial drawdown of RM500 million under the Sukuk Wakalah Programme of RM1.2 billion, EcoWorld’s gross DE and net DE ratios will stand at 0.60x and 0.41x, which are within the range of the FY2021 levels. We note that EcoWorld has redeemed its RM250 million unrated MTN in August 2022.
Cash flow protection and liquidity
For 3QFY2022, EcoWorld’s cash and bank balances stood at RM954.3 million, against short-term debts of RM1.3 billion. Of the total short-term debts, about 70% is made up of of revolving credit which does not require immediate repayment, and thus, minimising some liquidity pressure. Excluding its revolving credit, short-term borrowings stood at RM403.0 million during the period. Commensurate with the lower total borrowings of RM2.6 billion (FY2021: RM2.9 billion), CFO interest coverage in 3QFy2022 improved to 9.9x (FY2021: 7.0x). Based on its positive cash position as well as its listed status on bursa Malaysia, we believe the group to have strong financial flexibility should it need additional capital funding.
Peer comparison
RECOMMENDATION
BOND COMPARISON
Table 7: Bond comparison (data as at September 29, 2022)
Source: BIX Malaysia
Table 3: Selected profitability indicators (RM million)
| FYE October 31 | FY2018 | FY2019 | FY2020 | FY2021 | 3QFY2021 | 3QFY2022 |
| Revenue | 1,984.9 | 2,462.3 | 1,996.7 | 2,042.8 | 1,376.7 | 1,484.3 |
| Operating profit | 204.8 | 225.9 | 181.6 | 208.7 | 103.2 | 184.6 |
| PBT | 132.0 | 266.0 | 196.4 | 239.3 | 166.0 | 202.7 |
| Operating profit margin (%) | 10.3 | 9.2 | 9.1 | 10.2 | 7.5 | 12.4 |
Source: EcoWorld
In FY2021, the group posted a slight increase in revenue from FY2020. This was mainly driven by higher progress billings and some cost savings from the finalisation of certain construction contracts. Operating profit margin came in at 10.2% during the period, compared to 9.1% in the previous year. Due to similar factors, and combined with lower financing cost incurred as borrowings continued to be pared down from internal cash funds, EcoWorld’s profit margin for 3QFY2022 improved to 12.4% from 7.5% in the previous comparative period (3QFY2021).
The end-August 2022’s sales results made up 98% EcoWorld's full-year sale estimates of RM3.5 billion. We believe that the final quarter’s performance is expected to come in strong from property development activities, in view of a positive recovery of the overall economy.
Lower operating margin compared to peers
Table 4: Comparison on operating profit margin against major developers (2017-2021)
| Developer | Rating | Operating profit margin (%) | ||||
| 2017 | 2018 | 2019 | 2020 | 2021 | ||
| EcoWorld | AA-IS | 13.1 | 10.3 | 9.2 | 9.1 | 10.2 |
| UEM Sunrise Berhad | AA-IS | 13.4 | 23.3 | 16.5 | 0.2 | 0.7 |
| LBS Bina Group Berhad | Not rated | 15.5 | 17.4 | 16.1 | 17.0 | 17.3 |
| Tropicana Corp Berhad | A+IS | 15.9 | 21.6 | 35.4 | 35.2 | 13.0 |
| SP Setia Berhad | AAIS | 25.0 | 33.8 | 21.1 | 12.0 | 19.2 |
| Sime Darby Property Berhad | AA+IS | 15.3 | 11.8 | 13.9 | n.m. | 13.1 |
| IOI Properties Berhad | Not rated | 33.0 | 36.1 | 42.9 | 36.2 | 35.9 |
Source: EcoWorld
Despite the higher operating margin performance discussed above, its performance has been comparatively lower than most of its peers as the group had to acquire most of its landbank during the peak of the property cycle in 2014-2015. Additionally, the group incurred additional costs to build structural and aesthetic features for its projects, which have weighed on its profit margins.
Going forward, such additional costs are deemed minimal as its townships have matured with core infrastructure and amenities built in place. In the longer term, the existence of these lifestyle-enhancing features can enable the group to launch higher-margin developments in subsequent phases.
Capital structure
Table 5: Capital structure indicators (RM million)
| FYE October 31 | FY2018 | FY2019 | FY2020 | FY2021 | 3QFY2022 |
| Total borrowings | 3,831.2 | 3,779.4 | 3,316.4 | 2,880.0 | 2,602.0 |
| Cash and cash equivalents | 510.3 | 600.5 | 456.4 | 784.7 | 954.3 |
| Shareholders' equity | 4,327.6 | 4,538.0 | 4,645.2 | 4,765.3 | 4,762.6 |
| DE ratio (x) | 0.9 | 0.8 | 0.7 | 0.6 | 0.55 |
| Net DE ratio (x) | 0.8 | 0.7 | 0.6 | 0.4 | 0.35 |
Total borrowings declined to RM2.6 billion as at end-July 2022 from RM3.8 billion in FY2018 as borrowings were pared down through internal cash generation. This, together with the increase in shareholders’ equity, has resulted in DE ratio trending down to 0.55x from 0.89x in FY2018. The healthier capital structure thus provides headroom for funding activities, if needed. Assuming an initial drawdown of RM500 million under the Sukuk Wakalah Programme of RM1.2 billion, EcoWorld’s gross DE and net DE ratios will stand at 0.60x and 0.41x, which are within the range of the FY2021 levels. We note that EcoWorld has redeemed its RM250 million unrated MTN in August 2022.
Cash flow protection and liquidity
Table 6: Selected capital protection and liquidity indicators (RM million)
| FYE October 31 | FY2017 | FY2018 | FY2019 | FY2020 | FY2021 | 3QFY2022 |
| CFO | 532.0 | 381.6 | 716.2 | 672.6 | 1107.8 | 746.8 |
| CFO interest coverage | 7.62 | 1.80 | 3.30 | 3.60 | 7.00 | 9.89 |
| CFO debt coverage | 0.20 | 0.04 | 0.13 | 0.15 | 0.33 | 0.29 |
| CFO short-term debt coverage | 0.43 | 0.09 | 0.25 | 0.24 | 0.61 | 0.57 |
| CFO net debt coverage | 0.18 | 0.05 | 0.16 | 0.17 | 0.45 | 0.45 |
| FCF | -143.1 | 49.4 | 402 | 558.8 | 888.6 | 730.1 |
Source: EcoWorld
For 3QFY2022, EcoWorld’s cash and bank balances stood at RM954.3 million, against short-term debts of RM1.3 billion. Of the total short-term debts, about 70% is made up of of revolving credit which does not require immediate repayment, and thus, minimising some liquidity pressure. Excluding its revolving credit, short-term borrowings stood at RM403.0 million during the period. Commensurate with the lower total borrowings of RM2.6 billion (FY2021: RM2.9 billion), CFO interest coverage in 3QFy2022 improved to 9.9x (FY2021: 7.0x). Based on its positive cash position as well as its listed status on bursa Malaysia, we believe the group to have strong financial flexibility should it need additional capital funding.
Peer comparison
Table 7: Peer comparison
| EcoWorld | UEM Sunrise Berhad | LBS Bina Group Berhad | Sunsuria Berhad | Tropicana Corp Berhad | |
| Rating | AA-IS | AA-IS | Not rated | A+IS | A+IS |
| FYE | Dec-21 | Dec-21 | Dec-21 | Sep-21 | Dec-21 |
| Revenue (RM million) | 2,042.8 | 1,184.5 | 1,365.8 | 268.7 | 876.0 |
| Operating profit margin (%) | 10.3 | -8.7 | 17.3 | 18.7 | 13.04 |
| EBITDA interest coverage (x) | 2.1 | -0.3 | 4.85 | 3.31 | 0.75 |
| Cash and cash equivalents (RM million) | 784.7 | 858 | 284.8 | 258.8 | 805.3 |
| Total borrowings (RM ‘000) | 2,892.7 | 4,214.0 | 1,067.4 | 534.6 | 3,924.6 |
| DE ratio (x) | 0.6 | 0.6 | 0.63 | 0.51 | 0.66 |
| Net DE ratio (x) | 0.44 | 0.5 | 0.46 | 0.26 | 0.52 |
| Debt-to-EBITDA (x) | 12.4 | n.a. | 3.9 | 9.3 | 25.9 |
Source: Bloomberg
RECOMMENDATION
EcoWorld is regarded as one of the most successful property players in Malaysia, given its robust growth in sales performance over a short period of time since its inception in 2013. Despite the challenging operating environment in the local property market, the group has been able to demonstrate strong sale performance given various effective marketing strategies and innovative product mix to cater demand, supported by cost-effective efforts. In terms of financial impact from its international projects, we note that the impact is deemed minimal given the group’s 27% holding in ECWI.
Overall, the group’s financial performance is largely supported through its Malaysian projects where about 93% of total revenue is expected to be recognised in the future based on EcoWorld Malaysia’s equity interest. Considering this, as well as the current inflationary environment, we believe investors should position their portfolio towards a shorter duration bond, ECOWMK Oct2027 Corp (MYR) with a yield guidance of 5.35%. Comparing against other bonds with similar features in the market (Table 7), we think ECOWMK Oct2027 Corp (MYR) offers the best return for investors at this juncture.
BOND COMPARISON
Table 7: Bond comparison (data as at September 29, 2022)
| Bond/Sukuk Name | Issuer | Rating | Last Traded Yield (%) | Residual Tenure (Year) |
| ECOWMK Oct2027 Corp (MYR) |
Eco World Capital Services Berhad | AA-IS (MARC) | 5.350 | 5.000 |
| ECOWMK Oct2029 Corp (MYR) |
Eco World Capital Services Berhad | AA-IS (MARC) | 5.500 | 7.000 |
| S P SETIA IMTN 4.300% 23.06.2028 | S P SETIA BERHAD | AAIS (MARC) | 4.610 | 5.764 |
| S P SETIA IMTN 4.220% 21.04.2027 | S P SETIA BERHAD | AAIS (MARC) | 4.498 | 4.589 |
| IJM IMTN 5.050% 18.08.2028 | IJM CORPORATION BERHAD | AA3 (RAM) | 4.330 | 5.918 |
| GAMUDA IMTN 4.117% 18.11.2026 | GAMUDA BERHAD | AA3 (RAM) | 4.100 | 4.167 |
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.t holds a NIL position in the abovementioned securities.
