MARC Ratings has assigned a rating of AA-_IS(cg) to Eco World Capital Berhad’s Islamic Medium-Term Notes programme of RM1.2 billion under the Shariah principle of Wakalah Bi Al-Istithmar (Sukuk Wakalah programme). The rating outlook is stable. Eco World Capital is wholly owned by Eco World Development Group Berhad (EcoWorld) and is the financing vehicle that will undertake the issuance of the Sukuk Wakalah programme for which the parent has extended an unconditional and irrevocable guarantee. 

The assigned rating is driven by EcoWorld’s strong market position in township development and its consistently healthy sales track record that has engendered strong earnings visibility. The rating also factors in EcoWorld’s established brand name and sizeable landbank in key populous regions that would remain supportive of its growth prospects. Moderating the rating are the group’s relatively low operating margins and the prevailing challenging domestic property market conditions that could weigh on sales. 

A relatively recent entrant in the domestic property industry, EcoWorld has been able to attain a strong market position through an established brand name that is known for its well-planned and conducive township developments. The focus on developing residential properties in the mid-range segment has also been a factor in its good sales track record. As at end-April 2022 (1HFY2022), the group achieved an average take-up rate of 83.6% for its ongoing launched parcels. The projects are located in populous areas in the Klang Valley, Johor, and Penang. In addition to its township developments, the group also has a sizeable industrial portfolio with three business park developments in Johor and one in the Klang Valley. We note that with unbilled sales of RM3.6 billion for its Malaysian projects as at May 31, 2022, EcoWorld has healthy earnings visibility over the medium term. 

EcoWorld’s average operating profit margin of about 10% in recent years, however, remains comparatively lower than its major peers. This is mainly due to the high land cost as most of its land parcels had only been acquired over the last 10 years. Another factor is the additional costs incurred to incorporate structural and aesthetic features in its projects to attract homebuyers. Going forward, as the townships mature, with the bulk of the primary infrastructure and lifestyle amenities already completed, these features would allow the group to launch higher-margin developments in subsequent phases. Up to 1HFY2022, operating profit margin has improved to 16.4%. 

MARC Ratings observes that EcoWorld entered into joint ventures in order to reduce capital outlays for projects. Of its 18 ongoing projects, five projects are undertaken through joint ventures, including with government-owned UDA Holdings Berhad (UDA) and the Employees Provident Fund (EPF). As of May 31, 2022, EcoWorld has remaining landbank of 3,863 acres, located mainly in the Klang Valley (55%), Johor (38%) and Penang (7%) with potential gross development value (GDV) of RM58.4 billion. 

EcoWorld’s key joint-venture township projects are Eco Grandeur and Eco Ardence, with remaining GDV values of RM9.6 billion and RM5.7 billion. Its non-township joint venture project is the RM8.78 billion Bukit Bintang City Centre (BBCC) project in which EcoWorld has a 40%-stake, while the rest is held by UDA (40%) and EPF (20%). The project, which is to be completed in three phases, is on a 19.4-acre site and it has a remaining development period of eight years. The Group also has a joint-venture industrial park, Eco Business Park V which is located in Puncak Alam, Selangor, with a remaining GDV of RM1.9 billion. EcoWorld has minimal direct exposure to overseas property projects, which are undertaken by its 27%-held joint-venture Eco World International (ECWI). These projects, which are in the United Kingdom and Australia, are relatively mature and are in cash generation mode with combined unbilled sales of RM1.1 billion as of May 31, 2022. 

Over the past five years, EcoWorld recorded relatively steady financial performance with revenue generation ranging between RM2.0 billion and RM2.5 billion. MARC Ratings observes that EcoWorld has steadily pared down its borrowings over the years through internal cash generation. Total borrowings declined to RM2.6 billion while debt-to-equity (DE) ratio came down to 0.55x as at end-1HFY2022 (2018: RM3.8 billion; 0.89x). The group is expected to maintain its healthy capital structure with net leverage position hovering between 0.4x and 0.6x. EcoWorld’s inventory level remains manageable, standing at RM468.9 million as at end-1HFY2022.

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 and profitability generation and maintains a healthy capital structure with a leverage position of below 0.5x.

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 that would weaken the group’s balance sheet structure beyond the current rating band.