Eco World bets on Ijok

Developer aims big with a RM1.18bil move to buy over 2,000 acres

Property magnate Tan Sri Liew Kee Sin (pic) was once criticised for buying 4,000 acres in Shah Alam to develop a self-contained integrated township.

Market watchers back in 2002 said Liew had gone off his rockers for buying such a large plot of land, with some saying he was being too ambitious, especially because of its distance from the Kuala Lumpur city centre.

The deal, which involved SP Setia Bhd buying the oil palm plantation North Hummock Estate for almost RM600mil in cash, saw many concluding that it was too big for the then company with a market capitalisation of RM1.5bil to swallow.

The stock took a hit the day after SP Setia made the announcement, resulting in a 26 sen, or nearly 7%, fall to RM3.48 on April 3, 2002.

Now, more than 10 years later, that “ridiculously large” piece of land that was developed into what we now know as Setia Alam and Setia Eco Park, had won a slew of awards. These awards all praised Liew and the company for having vision and foresight in the development.

In 2003, SP Setia teamed up with two institutions, namely the Employees Provident Fund and Great Eastern Life Assurance (M) Bhd, to jointly develop part of the landbank in Bandar Setia Alam. This allowed it to minimise its capital commitment in the project, and opened up a new avenue for it to grow its business, rather than go through the traditional way of borrowing money to build a project.

Back then, property market observers were convinced that the company could extract a gross development value (GDV) of no more than RM5bil from the land. Today, Setia Alam and Setia Eco Park boasts an estimated GDV of about RM20bil, four times more than anticipated earlier.

It seems as though Liew is replicating the model, which he groomed and moulded during his time at S P Setia, at Eco World.

On Tuesday, Eco World announced in a filing with Bursa Malaysia that it proposed to buy 2,198.4 acres of leasehold land in Ijok, Kuala Selangor for a RM1.181bil.

The land is located at the north-west of Klang Valley and is 45km from the Kuala Lumpur city centre, 40km from the Petaling Jaya city centre and 18km from the Sungai Buloh town centre.

Its wholly-owned unit Paragon Pinnacle Sdn Bhd (PPSB) had entered into five separate sales and purchase agreements with Mujur Zaman Sdn Bhd, Ringgit Exotika Sdn Bhd, Liputan Canggih Sdn Bhd and LBCN Development Sdn Bhd to buy the land.

Eco World’s rationale for the acquisitions is that it would give the company sizeable tracts of land in the north-western growth corridor of the Klang Valley. Furthermore, such sizeable Klang Valley landbank comes as a rare opportunity. The company has already identified three projects to develop, including a 1,400-acre mixed-eco township project to be known as “Eco Gardens”, consisting mainly of landed and high-rise residential homes, among others.

It intends to build a 518-acre integrated gated industrial hub to be known as “Eco Business Park V”, and about 280 acres of affordable homes to be known as “Laman Indah”.

The estimated GDV is RM15bil over a 15-year development period based on the preliminary management estimates.

Analysts were surprised at the scale of the acquisition, saying that it would definitely put a strain on Eco World’s balance sheet, and nudge its net gearing levels up. If it shoulders the acquisition on its own, Kenanga Research says that this would increase its estimated net gearing for the financial year ending Oct 31, 2016 to 1.09 times from 0.73 times currently.

“We were taken by surprise by the magnitude of the land size especially when Eco World’s net gearing is expected to exceed the comfort levels of 0.5 times over the 2016 to 2017 estimate,” it says.

However, Eco World clearly indicated that it intends to fund the acquisition using a mix of internal funds, bank borrowings and, or equity funding. And to this extent, it is inviting institutional, private equity and corporate partners to jointly fund PPSB.

It is willing to let go of a 70% stake, while 30% is the minimum stake it wants to keep in PPSB, for it to be able to enjoy meaningful share of the development profits.

Analysts note that Eco World would prefer not more than three external investors.

These partners will enter a development management agreement with the company, where it will receive management fees.

CIMB Research says the company is already in the process of negotiating with potential new partners. It believes that Eco Gardens and Eco Business Park V could be the company’s first projects to have such a structure.

In Kenanga’s base case scenario where Eco World holds a 50% associate stake in PPSB, the company’s equity commitment would only increase 2016 estimated net gearing to 0.78 times. This is still manageable, says the research house, considering that it would take up to 2017 for property earnings to normalise.

It is “longer-term positive” on the acquisition, as long as Eco World is able to secure the right partners and does not assume more than an associate stake in the project for balance sheet management reasons.

“We believe this model is one of the best ways to grow their brand and future project earnings without overtaxing their balance sheet. If they do take on a subsidiary stake in this project, we do not discount the possibility of cash calls which would be dilutive to shareholders’ returns,” it says.

Amid a more subdued property market, Eco World is still taking advantage of landbanking opportunities and aggressively carrying out new launches. “Surprisingly, the recent launch of Eco Meadows enjoyed overnight queues. This exemplifies Eco World’s strong execution capability. We view Eco World’s gumption positively,” says CIMB.

But it now has run into a little hiccup. The Selangor government (MBI) “regretfully” said that the land Eco World is proposing to acquire is actually land involved in ongoing legal court proceedings with the state government.

MBI said it would explore any legal relief or remedies, which might include an application for an injunction due to action made by the vendors.

Eco World issued a statement on Thursday saying it believed the land referred to by MBI might be a separate parcel north of the land the company is proposing to buy.

It said it would meet with MBI officials soon to clear any doubts on the development. - By The Star