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Eastern & Oriental (Kenanga Research) trading buy; RM1.26

Eastern & Oriental
FY10 above expectations


• FY10 net profit of RM70.9m was above expectations, exceeding street’s FY10E net profit of RM59.9m by 18% and our RM56.7m by 25% . Eastern & Oriental (EOB) recorded FY10 sales of RM780.4m (+91% YoY) due to launches and sales of St Mary Service Residences (Block C, A) and Quayside Resort (Tower 1) @ Seri Tanjung Pinang (STP).

• YoY, FY10 net profit moved strongly into the black vs. FY09’s net loss, mainly attributed to FY09’s one-off losses and provisions amounting to c.RM30m. Commencement of billings from St Mary, completion of Waterside Suites @ STP (100% take -up) and improved take-ups for Acacia (semi-detached) @ STP were main earning drivers. Property gross margins were much stronger at 35% given product mix leaning towards higher margin products.

• QoQ, 4Q10 pretax prof it swelled 98% to RM42.3m because of RM35.1m gains on disposal of the Jln Tengah (Lot 595) land. l Proposed first and final GDPS of 3.8sen less 25% tax; corresponding gross yield of 4.3% is slightly above peer’s 3% -4%. We were pleasantly surprised as we were not expecting dividends in FY10. EOB wants to reward its  shareholders for its strong cash flow and balance sheet recovery; notably cash pile has increased 127% YoY to RM559m while net gearing is lower at 0.4x from FY09’s 0.8x. FY10
net dividend payout is 30% and management guides it will try to maintain/increase payouts depending on property sales and group performances.
 
• Raising FY11-12E net profit by 18%-1% to RM57.8m-RM73.9m to reflect better than expected sales for Quayside Resort-Tower 1 and official launch of 2nd tower in 2Q11. Unbilled sales is healthy at RM540.6m, providing >1 years visibility. EOB is feeling confident with its stronger balance sheet and may soon launch niche projects along Jalan Yap Kwan Seng or  sell plots of land at The Peak, Damansara Heights; GDV will only be provided once launches are firmed.

• Fair value slightly higher at RM1.27 based on 0.9x peer PBV on FY11E BV/share of RM1.41. At current price, EOB is attractive at 0.6 x PBV vs 0.8x historical averages. But we think earnings still need to catch-up as FY11-12E recurring PER of 12x-9x is only on par with peer’s 12x-10x. Hence, we reiterate our Trading BUY on EOB given 1) strong YoY earnings growth from on-going projects (2yr CAGR of 29%) 2) positive news flow from new projects like Yap Kwan Seng and Kemensah Heights 3) intention to convert ICSLS to EOB shares.

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