E&O’s billing progress slower than expected

Eastern & Oriental Bhd (Aug 26, RM1.49)

Maintain buy with an unchanged target price (TP) of RM2.54: Eastern & Oriental Bhd’s (E&O) net profit of RM23 million in the first quarter ended June 30, 2015 (1QFY16) represents only about 16% of the financial year ended March 31, 2016 (FY16) consensus forecast of RM150 million and our estimate of RM143 million.

Billing progress on unbilled sales of RM900 million was slower than expected, but we expect billings to pick up in subsequent quarters. Unrealised foreign exchange (forex) gains of RM15.7 million and gains from the sale of its 50% stake in the Sungai Besi land boosted associate income to RM20.7 million. Excluding the forex gains, core net profit was RM9 million in 1QFY16 compared to a RM2 million loss in the fourth quarter of FY15 (4QFY15).

Revenue fell 47% quarter-on-quarter (q-o-q) in 1QFY15 due to the absence of land sale in Jalan Conlay in a joint venture with Mitsui Fudosan Asia Pte Ltd. Revenue was down 52% year-on-year (y-o-y) due to the completion of Quayside Andaman Condominium, which boosted revenue in 1QFY14. The fall in revenue and high fixed costs led to a loss before interest and tax of RM4 million in 1QFY16.

We gather that pre-sales property achieved in 1QFY16 amounted to RM585 million. This was mainly driven by the successful launch of its Tamarind Tower A condominium with a gross development value of RM472 million (90% take-up rate). Planned launches include the Avira Garden Terraces Phase 2 and luxury condominium in Jalan Conlay in early 2016. E&O’s revalued net asset value of 0.4 times was at a sharp discount to the sector average of 0.6 times. Imminent potential catalysts to drive a positive rerating would be the implementation of the RM27 billion Penang Transport Master Plan project and the appointment of a reclamation contractor for Phase 2A of its Seri Tanjung Pinang (STP2) project in 3QFY15. Key risks to our positive call are slow property sales and execution risk on the STP2 project. — Affin Hwang Capital, Aug 25

This article first appeared in the digitaledge DAILY on Aug 27, 2015. Subscribe here.