Challenging outlook remains for E&O

Eastern & Oriental Bhd (Feb 24, RM1.90)

Downgrade to hold with a lower fair value (FV) of RM1.98: We “downgrade” our call on Eastern & Oriental Bhd (E&O) to “hold” (from “buy”) with a lower FV of RM1.98 per share (from RM2.76 previously), attaching a 30% discount to our fully diluted net asset value to factor in a downward revision of our earnings forecast. We cut our financial year 2017 (FY2017) to FY2018 net earnings forecasts by 51% to 63%, and introduce our FY2019 forecast numbers.

E&O’s nine-month FY2017 (9MFY2017) core net earnings of RM38.1 million came in below our expectation at 32% of our full-year forecast but within the consensus’ at 85%. Its 9MFY2017 pre-tax profit grew 21.2% year-on-year (y-o-y) to RM66.4 million on the back of a 78.5% y-o-y growth in revenue to RM485.9 million.

The strong performance was contributed mainly by the property segment, of which revenue jumped 118% y-o-y to RM401.3 million, while operating profit surged 353% y-o-y to RM107.2 million. No dividend was declared for the quarter.

E&O achieved total new sales of RM256.4 million in 9MFY2017. Penang made up the majority of the total amount, accounting for 89% of total sales. Unbilled sales stood at RM856 million as at the end of the third quarter of FY2017.

The higher revenue in the property segment was mainly due to higher revenue recognition from the ongoing projects in Penang, namely The Tamarind, the Amaris Terraces and the low- to medium-cost apartments in Seri Tanjung Pinang (STP), higher sales of completed properties, and due to the recognition of sales upon handover of residential units of Prices House, E&O’s maiden project in Central London, the UK.

The hospitality division’s operating profit remained flat at RM2.3 million, although revenue dropped 3.3% y-o-y to RM82.7 million due to the disposal of The Delicious Group which was completed in August 2016.

Amid the challenging operating environment, E&O’s recent launches still managed to record strong take-up rates. The take-up rate of The Tamarind executive apartments, a high-rise development with a gross development value of RM950 million, stands at 95%, while its Amaris Terraces has achieved a 65% take-up rate since its launch in December 2016.

We expect management to remain cautious about its new launches due to challenging market conditions. It will launch its Ariza Seafront Terraces in the near future, another development within the mature neighbourhood of STP. — AmInvestment Bank, Feb 24

This article first appeared in The Edge Financial Daily, on Feb 27, 2017.

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