MARC Ratings has affirmed its rating of AA-_IS(cg) on Eco World Capital Berhad’s Islamic Medium-Term Notes (Sukuk Wakalah) Programme of RM1.2 billion. The rating outlook is stable. Eco World Capital is the financing vehicle of parent Eco World Development Group Berhad (EcoWorld) which provided an unconditional and irrevocable guarantee on the programme.

The rating affirmation incorporates EcoWorld’s strong market position in township development, healthy sales track record and improved balance sheet. Moderating rating factors are the rising operating cost and the prevailing challenging property market conditions. 

The group has a sizeable property portfolio with the total gross development value (GDV) of ongoing projects standing at RM9.7 billion, recording an average take-up rate of 76% as at end-April 2023 (1HFY2023). MARC Ratings views the strong response as attributable to EcoWorld’s well-established brand name and the location of the majority of its projects being in populous areas in the Klang Valley, Johor, and Penang where demand is relatively stronger.  In addition, the group also has a large industrial portfolio with three business park developments in Johor and one in the Klang Valley. The rating agency notes that the group has sizeable unbilled sales for its domestic projects which stood at RM4.2 billion as at end-May 2023; this will provide strong earnings visibility over the medium term.

Inventory for completed properties declined to RM275 million (end-2022: RM361 million) while its remaining landbank of 3,056 acres as at end-May 2023 — mainly in the Klang Valley (60%), Johor (33%) and Penang (7%) — remains supportive of its growth prospects. EcoWorld has exposure to overseas property projects in the UK and Australia, which are undertaken by its 27%-held joint venture (JV) Eco World International (ECWI). In the immediate term, ECWI intends to pursue monetisation of its completed property units on hand and distribute excess cash to its shareholders.

MARC Ratings observes that EcoWorld’s operating profit margin has steadily improved over the years, standing at 20.4% as at end-1HFY2023 (FY2022: 12.7%). The improvement is on the back of the completion of primary infrastructure and amenities for most of its projects as well as higher margins on certain properties sold. The stronger margins would also provide a buffer against higher material and labour costs. 

For 1HFY2023, revenue declined by about 13% y-o-y to RM905.6 million due to the completion of fewer projects during this period. Borrowings declined to RM2.6 billion which translated to a debt-to-equity (DE) ratio of 0.53x and net DE ratio of 0.31x. The group issued an additional RM550 million under the Sukuk Wakalah Programme on August 10, 2023, which will be used to partially refinance its existing borrowings and for working capital. With a potential net increase in debt of RM350 million following the issuance, the DE ratio will increase to 0.60x with the net DE ratio increasing to around 0.39x. With the recent issuance, the total outstanding amount under the programme stood at RM1.1 billion as at end-August 2023.

The stable outlook reflects our expectation that EcoWorld will broadly maintain its credit metrics within the current rating band in the near term.

The rating could be upgraded if the group sustains its revenue growth and improves its financial metrics, in particular CFO/debt and CFO/interest, notwithstanding the challenging property market conditions. 

The rating could come under pressure if there is a sharp decline in sales performance and/or an unexpected spike in borrowings without sufficient visibility on earnings accretion.