• Significant improvement in unbilled sales & net gearing, in strong position to replenish landbank
• RM2.5b upcoming launches in Penang & KL
• Maintain Buy and RM1.40 TP (30% discount to fully diluted RNAV of RM2.07)
E&O will be attending our Pulse of Asia conference on 8 Jul 2010. E&O is one of our top buys for Malaysian property sector.
What a turnaround! FY10 sales surged 91% to RM780m while unbilled sales tripled to RM540m. And with the completion of its rights issue in Nov09, net gearing improved significantly to 37% from 1QFY09’s 84% with cash reserves at RM560m. E&O is in a strong position to accelerate launches and seek opportunistic landbank acquisitions.
Earnings to leapfrog. Take-up rates at on-going launches have reached 65% i.e. St Mary (Tower C: 85% @ RM900psf; Tower A: 50% @ RM1350psf) and Quayside STP condo (ASP: RM685psf). We expect earnings momentum to pick up (3-year CAGR of 53%) with: a) S-curve recognition of profits as construction progresses; b) RM2.5b-launch pipeline in Penang and Kuala Lumpur; c) Straits Quay retail marina rental from Dec10 onwards (but potential start-up losses); and d) completion of Penang hotels expansion.
Valuation undemanding. E&O is trading at 55% discount to its RNAV of RM2.07 vs the sector’s 40%. We have yet to factor in the 740-acre STP Phase 2 (yet to be reclaimed) which could add RM1.58 to RNAV. Aside from robust sales, potential catalysts include approval for Kemensah Heights and STP Phase 2, en-bloc sales/international JV partner for its larger projects, and prime landbank acquisitions (e.g. participation in government land redevelopment as credible JV partner given E&O’s strong brandname and track record).
Niche high-end developer with prime landbank. E&O is the largest landowner on Penang Island (1,123 acres, including reclamation rights to 740-acres Seri Tanjung Pinang Phase 2), and also has exposure to prime KL landbank (333 acres). It has been leveraging on its strong brand name and quality track record to set new price benchmarks (typically 30-40% premium over competitors) and achieve good take-ups. E&O has emerged stronger post-completion of a merger exercise with its then subsidiary, E&O Property Development in Jul08 and RM236m rights issue in Nov09.
Industry Overview, Earnings Drivers & Risks
Full steam ahead. The strong appetite for upper mid-high end properties has not been doused by the reintroduction of real property gains tax (RPGT) and rising mortgage rates. Demand should remain robust driven by high affordability, improved consumer sentiment, and inflation hedging. Although OPR may rise by cumulative 75bps by 1Q11, this is largely expected and should be cushioned by developers’ attractive incentive packages and high affordability levels. Mortgage rates will likely remain accommodative given intense competition among banks and ample liquidity (loan-deposit ratio: 75%).
Margins expanding. Given the strong demand recovery, developers are becoming more confident - setting higher sales targets, bringing forward launches and replenishing landbank. Average selling prices (ASP) have also inched up, while incentives are gradually rolled-back. This should lead to stronger margins in the coming quarters.
Lower policy risk. We see minimal signs of a property bubble as average house prices have been largely tracking income growth and inflation. Unlike regional peers which have seen new price benchmarks post-financial crisis, KLCC and Mont’ Kiara high-end condos’ ASP are still 20% below peak. We view the government’s plan to redevelop prime parcels in Klang Valley positively, as it should reduce risk of adverse policy changes (such as higher RPGT), although proper planning will be essential to avoid potential oversupply of commercial space. Upside could also come from infrastructure improvements (e.g. LRT extension) and spill-over benefits of Singapore’s integrated resorts’ launch (Malaysia is a favourite second destination for tourists visiting Singapore).
Earnings momentum should pick up with:
a) S-curve recognition of profits as construction progresses. Most of the new launches in FY10 (St Mary, Seri Tanjung Pinang terrace houses and condos) have yet to make meaningful earnings contribution, but this should accelerate in FY11-12;
b) RM2.5b-launch pipeline:
i) Penang: The first block of Quayside condos has achieved 65% sales at average price of RM685psf. E&O will be launching the next block soon at its new Singapore sales office (300 units at ~RM750psf). The remaining 5 blocks (610 units) will be released gradually depending on demand. Other launch-ready products at Seri Tanjung Pinang include seaside terraces (final batch, >RM1.5m/unit) and villas (35:65 JV with Al-Salam Bank of Bahrain & Mapletree Trust; >RM3.3m/unit).
ii) KL: Jalan Yap Kwan Seng high-end condos (ASP: ~RM1200psf), Jalan Conlay luxury condos (ASP: >RM1500psf), and the Peak bungalow plots at Damansara Heights (>RM800psf);
c) Straits Quay retail marina rental from Dec10 onwards (but potential start-up losses of ~RM8m); and
d) Completion of Penang hotels expansion. Lone Pine will have 90 rooms by Nov10 (from 50), while E&O Hotel’s capacity will increase to 136 from 100 by end-11.
Financials and Valuation
Valuation undemanding. E&O is trading at 55% discount to our RNAV of RM2.07 vs average sector discount of 40%. The 740-acre Seri Tanjung Pinang Phase 2 (yet to be reclaimed) could add RM1.58/share, bringing our RNAV to RM3.65. Upside could also come from the launch of Kemensah Heights (GDV: ~RM2b), and new landbank acquisitions. Earnings visibility (expected 3-year CAGR of 53%) will be underpinned by RM540m of unbilled sales (1.3x FY10 property development revenue) and RM2.5b-worth of new launches.
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