Unfazed by debt concerns, EcoWorld focuses on generating sales

TheEdge Tue, Oct 22, 2019 03:00pm - 4 years View Original


IT has been six years since Eco World Development Group Bhd (EcoWorld) burst onto the real estate scene with the reverse takeover of Focal Aims Holdings Bhd.

Spearheaded by Tan Sri Liew Kee Sin, who exited S P Setia Bhd in 2014 with a team of people, EcoWorld has expanded by building its land bank and launching new projects aggressively, at a time when most other developers were feeling the chill winds of a slowing property market.

Today, EcoWorld has emerged as one of the top developers in the country, generating a net profit of RM166 million in its financial year ended Oct 31, 2018 (FY2018).

Since its inception, the group has launched 22,490 properties, sold 19,999 of them and secured cumulative sales of RM18.35 billion. Moreover, it still has a land bank of 4,467 acres with an estimated gross development value of RM69.254 billion.

These figures are impressive for a six-year-old developer that started almost from scratch.

But any success that comes within a short time has a cost, and in the case of EcoWorld, this is reflected in its debt position.

As at July 31 (9MFY2019), EcoWorld’s net gearing ratio was 0.75 times. According to absolutelystocks.com, its gearing had increased from 0.6 times in FY2016 to 0.71 times in FY2017, before rising further to 0.75 times in FY2018.

While EcoWorld’s debt levels have stirred concerns among certain quarters, group CEO Datuk Chang Khim Wah is unfazed, saying that it is manageable.

“We appreciate that relative to our peers, many of whom have been in business for decades, our gearing is higher. The relatively higher gearing is due to our rapid growth and expansion as one of the newest property players in the country,” he tells The Edge.

Chang points out that within a short time of only six years, EcoWorld has acquired more than 8,000 acres of land and launched 18 projects. Many of these are large townships spread out over the Klang Valley, Iskandar Malaysia and Penang.

“Apart from land acquisition, we have invested heavily in infrastructure and amenities to accelerate value creation for our buyers. When you visit any of our townships, you will see the signature EcoWorld DNA that we have promised to our buyers in our brochures is delivered,” he explains.

The EcoWorld team believes that it is important for potential buyers to see infrastructure such as roads, bridges and parks in place ahead of launches and delivery of properties — a strategy that is similar to what they had done successfully at S P Setia.

But this means that their upfront costs will be higher.

A quick check shows that the likes of Sime Darby Property Bhd, Tropicana Corp Bhd and IOI Properties Group Bhd have a gearing of not more than 0.5 times, a threshold that many major developers try not to cross.

Others like S P Setia have a gearing of 0.57 times, whereas LBS Bina Group Bhd and GuocoLand (M) Bhd are at 0.7 times.

UEM Sunrise Bhd, which was recently rumoured to be looking at acquiring EcoWorld in a share swap deal, has a much lower gearing of 0.4 times. UEM Sunrise had clarified that it has neither made nor received any corporate proposal from any party for its consideration.

 

Strong future revenue

Although EcoWorld is mindful of its debt position, it is not unduly worried.

Chang opines that when future revenue from locked-in sales starts to kick in and cash begins to flow in, EcoWorld’s debt is expected to come down over time.

“When investors look at our company, we believe that they should also take into consideration our speed to market, our execution capability, the enhanced value of all our land bank and our ability to continually generate strong sales due to the fundamental desirability of our projects,” he says.

“We believe our gearing is more than manageable, given our strong sales, high level of future revenue and our ability to quickly respond to market changes and adapt our product offerings to suit the needs of our target market.”

He adds that EcoWorld’s strong financial growth reflects the ongoing translation of its consistently high future revenue into profit.

As at Aug 31, EcoWorld had RM5.859 billion in future revenue from locked-in sales, which provides a clear near and mid-term earnings visibility as well as strong cash flow to enable it to repay its loans.

“This will enable us to grow our shareholders’ funds, thereby bringing down the gearing levels naturally,” Chang says.

He also highlights that a large proportion of EcoWorld’s debt is project-based and, hence, will be repaid progressively to the banks via redemptions from property sales.

“The strong sales our projects have achieved individually mean that for the majority of our loans, repayments from redemptions are well ahead of our scheduled instalment payments,” he says.

Nevertheless, research analysts The Edge spoke to maintain some concerns.

“[A gearing ratio of] 0.7 times is considered quite high, given that the industry average is 0.3 to 0.4 times. If you are a new player in a good market, then a high gearing is fine. But in a bad market, you need to be careful,” says a senior property analyst from a local bank-backed investment bank.

Another property analyst says, “The biggest difference between EcoWorld and its peers is that it is relatively new, and it bought the land when the market was at its peak. That’s why it has to spend a lot more on advertising and promotional activities.

“They can sell very well in the first few years because Tan Sri Liew is an exciting brand name himself, [but current] market sentiment is weak.”

EcoWorld’s Chang, however, remains optimistic.

“Although the Malaysian property market today is going through a rough patch, we should not lose sight of the big picture and the opportunities that our country’s relatively young demographic, strong household formation and changing lifestyle needs can provide developers that are willing to meet these challenges head on,” he says.

It is worth noting that Eco World International Bhd (EWI) — 27% associate company of EcoWorld — also had RM5.763 billion in future revenue from locked-in sales as at Aug 31, giving it a strong earnings visibility in FY2019 and FY2020.

EWI, which is a foreign arm set up to focus on real estate development outside Malaysia, has a lower gearing of 0.34 times.

It is worth noting that EcoWorld’s future revenue of RM5.859 billion includes RM4.303 billion from projects in Malaysia and RM1.556 billion from its effective interest in EWI’s future revenue.

 

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Comments

Wilbert Goh
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How about gearing of Mahsing?

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