EcoWorld: Set For Explosive Growth

Since it acquired Focal Aims's shares at RM1.40 per share in Sep last year, Eco World's share price has appreciated more than 5-fold, from less than RM1 to more than RM5.

I didn't buy Eco World's shares as I don't know how much it can earn in the future, even though I'm quite sure that it will reach SP Setia's current level in the future. However, how many years will it take? Is it worth to park my money here for many years?

Now here comes some clues.

As expected, Eco World has made a few major corporate exercises which will propel it to be one of the largest property developer "overnight".

In summary, Eco World Bhd proposed to acquire the development rights to 8 projects and the shares of a company with development land from the subsidiaries of its private company Eco World Sdn Bhd.

Before this, the listed part of Eco World only has one on-going project at Kota Masai township with 991.6 acres remaining, which was inherited from Focal Aims. The other project EcoSanctuary at Kota Kemuning, which was recently acquired from Tropicana, is only expected to be launched in 2015.

After the proposed acquisition, Eco World's total landbank will increase from 1,326 acres to 4,433 acres, while total GDV will increase almost 3-fold from RM13.5bil to RM43.5bil.

The table below shows Eco World Bhd & Eco World Sdn Bhd's landbank, in which all are in the property hotspots of Klang Valley, Iskandar Johor and Penang.

Eco World has already launched EcoSky (GDV RM970mil) and EcoBotanic (GDV RM3.79bil) in the fourth quarter of last year. It plans to launch all its other projects except EcoMacalister between 2014-2015.

It sets a sales target of RM2bil in 2014 and RM3bil in 2015. It has achieved sales of RM1.13bil as at 31 Mac 2014 from the two projects launched last year.

Eco World plans to launched another 6 projects shortly within the 3rd and 4th quarter of this year. They are EcoMajestic, EcoSpring, Eco Business Park I & II, EcoTropics and EcoTerraces. 

EcoMajestic at Semenyih which has 1,073 acres land will be Eco World's largest township development at the moment. Inevitably this makes me link it to the success of Setia Alam by SP Setia.

The maps below show the location Eco World's projects.

       Eco World In Penang

       Eco World In Klang Valley

       Eco World In Iskandar Johor

To fund all these acquisition, Eco World will pay Eco World Sdn Bhd's shareholders (EW Holdings & Sinarmas Harta) in the form of Eco World's shares (shares subscription), as well as proposing rights issue with free warrants and then a 20% private placement.

Currently Eco World has total paid-up shares of 253.3mil, with par value RM1.

First, it will carry out share split of 1 into 2 ordinary shares, to total 506.6mil shares with par value of 50sen each.

Then EW Holdings and Sinarmas harta will subscribe to 403.4mil new Eco World's shares each, for RM1.70 per share, thus increasing the total paid up shares to 1,371.64mil. 

After the share subscription, the public will only hold 13.48% (from 34.95%) of Eco World's shares, which will not be compliant to listing requirement of at least 25% shares in public hands.

Because of this, EcoWorld has proposed rights issue with free warrants and then 20% private placement.

The proposed rights issue with free warrants will raise approximately RM788mil before full exercise of the warrants. The number and pricing of the rights share are yet to be determined, but the price is expected to be fixed at not less than 20% discount!

After the rights issue, Ecoworld will carry out placement of shares up to 20% to investors to be identified later.

Below is the estimated paid-up shares after all the corporate exercises are completed. The number of shares after the share subscription is confirmed. After that, all are just base on assumption only.

In the calculation above, the proposed rights issue is assumed to be 1 rights to 2 ordinary shares at RM1.20 each, and 4 warrants for every 5 rights shares with exercise price of RM1.97 for warrants.

Even before any warrants are converted into shares, Eco World's total paid up shares already surges to 2.364 billion, about 4.6 times more than its total shares now after share split.

So the earning will be diluted by 4.6x (if the assumption on rights issue is true) and the GDV will increase by 3x.

       EcoSky

How "BIG" will Eco World be after all the proposed corporate exercises completed?

We know that Eco World will have 4,433 acres of land with total GDV of RM43.5bil after this. Lets compare with other major developers in Malaysia.

The table below is obtained from CIMB analyst report dated 31 March 2014.

In term of landbank, Eco world with 4,433 acres will become the third largest land owner in the list behind UEM Sunrise & SP Setia. In term of GDV of RM43.5bil,  it will still be quite a distance behind UEM Sunrise, Tropicana & SP Setia.

What should be the fair value for Eco World's share price?

Eco World's share closed at RM5.40 last weekend. Is it worth to buy now?

If the share split happens now, the price will be adjusted to RM2.70. Remember that the share subscription is fixed at RM1.70 per share, while the rights issue price is assumed to be only RM1.20 after at least 20% discount. 

After the proposed rights issue and placement are completed, the total paid up shares are assumed to jump to 2,364 million (exclude warrants conversion). 

If the fair value is RM2.70 (or RM5.40 before split) given a PE ratio of 15x, the EPS should be 18sen. For total shares of 2,364mil, its profit attributed to shareholders needs to be RM425mil.

Can Eco World achieve RM425mil annual net profit in the next few years?

Below are the FY13 results & latest PE ratio of other major developers.

FY13 RM	Rev (bil)	PATAMI (mil)	PE
UEMS	3.43	579.1	18.4
SPSetia	3.06	417.8	17.9
Tropicana	1.48	362.3	6.0
Mahsing	2.00	280.6	11.6

After comparing to the others, do you think RM400mil annual net profit is achievable for Eco World, given its target sales of RM5bil in the next 2 years?

I'm not sure. What I only know is that its projects will sell very very well.

If Eco World can get about 15% net profit like SP Setia, then it will be RM750mil net profit from the RM5bil sales but this should be divided into 3-4 years.

I don't think Eco World can produce an impressive result for its FY14 which will end in Sep14. So far its FY14Q1 only produced PATAMI of RM0.8mil out of revenue of RM22.6mil, even though it has achieved sales of RM1.13bil in Mac14.

So I think it will take quite a number of years before it can reach the earning level of SP Setia which Mr Liew Kee Sin took decades to build.

Anyway, there will be a further 20% earning dilution in the future when the warrants are fully converted to mother shares.

Eco World & Tropicana, both are going for fast & furious growth, both has precious land at Macalister Road Penang and Canal City, which one do you think is better?

Eco World & Liew Take Center Stage

Recently we can see Eco World's advertisement all over the place, billboards, radio, newspapers etc. Eco World might be a new comer in the property development scene, but they come with vast experience in this field and they will be aggressive in the market.

Eco World's CEO Dato Chang Khim Wah, directors Dato Leong Kok Wah & Tan Sri Abdul Rashid all jumped ship from SP Setia. Another young director Liew Tian Xiong is the son of current SP Setia's CEO Dato Seri Liew Kee Sin.

Recently on 17th September 2013, Eco World and one of its director Liew Tian Xiong has entered into a conditional share sale agreement with multiple shareholders of main board listed property developer Focal Aims, to acquire 164,775,701 shares (65.05%) of Focal Aims for a total cash of RM230.7mil (RM1.40 per share).

If this acquisition go through, Eco World as a new major shareholder has to make a mandatory offer of RM1.40 to other shareholders in Focal Aims.

Focal Aims net asset per share stands at RM1.26 from its latest financial period ended 30th June 2013. Its share was traded between 60-70sen before the news broke out. Now it has reached over RM2.

Liew Kee Sin's time in SP Setia is going to end soon, and it is not hard to predict where he will land next.

Eco World just launched its maiden project EcoBotanic in Nusajaya, Iskandar Malaysia. Its initial launch include 624 units of cluster & semi-D houses which are priced at RM900k - RM1.3mil & RM1.8 - RM2mil respectively. They are all luxury things and do not come cheap. Nonetheless, it was reported that those 500 units allocated to non-bumi were snapped up in 6 hours. 

EcoBotanic covers a 118.8ha site and has a GDV of RM3 bil which will be developed over 8 years.

       EcoBotanic: Next to industrial park & highway? Who cares?

       EcoBotanic: Power lines in the vicinity? Who cares?

You think it is a not so "eco" EcoBotanic? Who cares? It has SP Setia's DNA. Yes, this is what people care nowadays.

       Location of EcoBotanic within Iskandar Malaysia

Other projects that queue up at Eco World include the RM1.2bil EcoSky in Taman Wahyu KL and a new 246ha township in Tebrau Johor. EcoSky is expected to be launched in the final quarter of 2013 while development at Tebrau should start in 2nd quarter of 2014.

Eco World says that it has a total of 3,000 acres landbank located at Johor (1913 acres), Klang valley (1080 acres) & Penang (60 acres) with a total GDV of RM30 billion. Recently it works with Salcon to develop a RM1.2 billion mixed commercial project JB Festival Mall & Serviced Apartments in Johor Bahru. Salcon's executive director Leong Kok Wah is also Eco World's director.

Tropicana has about 2,300 acres of landbank including the recently purchased Pulai land. This means that Eco World has more landbank than Tropicana.

However, it is reported that Tropicana's total GDV stands at RM70 billion (excluding Pulai land). Wow! Can you believe it?

Tropicana: New Name, New CEO, New Level

Since year 2010, Dijaya has been busy buying lands. In Aug 2012, almost RM1 billion worth of private land & properties were injected into it through the amalgamation exercise. All this has turned its balance sheet from a net cash position in 2010 into 0.8x gearing with a total borrowings of RM1.8 billion  at the end of FY2012.

Dijaya seems not satisfied being a mid-size property developer. It certainly wants to join the likes of UEMLand, SPSetia, Mahsing, IJMLand & Sunway. 

After the amalgamation exercise and ballooning of its debt, Dijaya has undergone a de-gearing exercise which aims to reduce its gearing from 0.8x to 0.5x in 12 months. The CEO has been changed to Dato Yau, the ex-Sunway MD who is experienced in de-gearing. The company name has been changed to Tropicana Corporation Berhad.

Through the de-gearing exercise, Tropicana will dispose some of its "not-so-strategic" land and non-core property investment to generate some cash. This exercise enables Tropicana to reduce its debts and concentrate on a few important property development in the future.

For the FY ended in 2012, Tropicana's revenue increases almost 70% from RM374m to RM630mil. Its net profit jumps 160% from RM65m to RM169m, mainly through sales of land which generate a handsome profit. It has sold 6 parcels of land worth RM219m in 2012. Tropicana has said that land investment/trading has become one of its business.

In year 2013, the land sale continues with the disposal of Tropicana Bayou Balakong & Desa Aman Puri Kepong. Yesterday, Tropicana announced that it has sold a 6.41 acres commercial land worth RM116m in PJ within the Tropicana Golf & Country Resort to Mulpha Land. 

       Penang World City

Ironically, while it is busy de-gearing itself, in mid April 2013, Tropicana announced that it has purchased a huge land at Canal City measuring 1172 acres from Selangor government at a price of RM1.3 billion (RM25 psf). However, this land purchase is widely viewed as a positive move because of its location within the Klang Valley and its big size which can be developed into a well-planned township.

The Canal City was initially a flood mitigation plan by the state government but it has been aborted in 2011. Most of the Canal City land (1900 acres) has been given to IJM Land and it has been used to develop Bandar Rimbayu, where its recently launched first phase has received overwhelming response. The rest of the land is now acquired by Tropicana.

With the inclusion of the Canal City land, the total land banks of Tropicana has more than doubled from 900 acres to 2000 acres, with an estimated GDV of a whopping RM70 billion, which is the highest among all property developer in Malaysia. With a market cap of RM1.8 billion (RM1.90 per share), its GDV/market cap ratio stands at 39x, in which most other big players stand at below 10x.

       Tropicana Metropark

This reveals Tropicana's ambition to grow towards a big cap company. For this, it must have strong institutional investors, which it currently lack. Thus, in early June 2013, Tropicana's chairman has sold 2% of his shares to EPF at a price of RM1.78 per share. The company says that it will continue to attract more institutional investors.

	Year	RM mil
		Revenue	Net Profit
	2008	247	33
	2009	311	50
	2010	292	45
	2011	373	65
	2012	630	169

The net profit of RM169m in FY2012 is what Mahsing earned in FY2011. Though the revenue has grown massively, it is partly contributed by land sales. As the company will continue to sell more land or investment property, do expect the quarterly earning to be patchy. 

However, it is expected that Tropicana will continue to post strong revenue & earning for the next few years from land sale and new property launch. Besides, Tropicana also has a stream of good recurring income from its property investment division, mainly from Tropicana City Mall & Office rental. It has an unbilled sales of RM951 million at the end of 2012.

       W KL Hotel & Residence

The reason for the high GDV Tropicana enjoys is the strategic location of its land banks. Currently Tropicana has lands in 3 hottest property spots in Malaysia, which are Klang Valley, Iskandar and Penang island.

       Tropicana Danga Bay - Tropez Residences

In FY2013, Tropicana plans to launch RM2 billion worth of property. This includes Tropicana Gardens in Kota Damansara which are almost sold out for the first 2 phases launched earlier this year, Tropicana Metropark at Subang Batu Tiga, Tropicana Heights in Kajang, W KL Hotel & Residence at KLCC (starwood brand), Tropicana Danga Bay & Danga Cove in Iskandar, Tropicana McAllister & Penang World City in Penang island.

       Tropicana Gardens

Having a lot of assets or land in strategic location does not translate into success. It depends on the skill of the management team to turn it into good profit. Tropicana needs to come out with good project at good timing in order to grow consistently and become a big player.

If you believe in current Tropicana's management team and you believe that the property sector can strive for at least 5 more years (people start to talk about property bubble since 2010), then Tropicana's shares may be good to hold.