Eastern & Oriental Bhd (Aug 25, RM1.47)

Downgrade to fully valued with a lower target price (TP) of RM1.20 from RM2: Eastern & Oriental Bhd (E&O) reported core earnings of RM7.5 million for the first quarter of financial year 2016 (1QFY16) — an increase of 123% quarter-on-quarter (q-o-q), a decrease of 60% year-on-year (y-o-y) — after stripping out RM15.7 million unrealised foreign exchange gains. This only contributes 9% of our full-year forecast.

The weaker-than-expected results were largely due to lower revenue (a decrease of 52% q-o-q, a decrease of 47% y-o-y) following the completion of two blocks of the Andaman Condominium project in 4QFY15, and most of its unbilled sales were booked under joint-venture projects.

Net gearing rose to 63% as at June 2015, the highest in recent years, largely due to a slew of UK land bank acquisitions in FY15.

E&O secured RM585 million sales in 1QFY16, mainly underpinned by the overwhelming response to the first block of the Tamarind executive apartment project that is worth RM470 million in gross development value. It is on track to launch the second block of the Tamarind executive apartment, which has received strong registrations despite the weak sentiment.

The listing of its UK property arm on the Alternative Investment Market of the London Stock Exchange will raise at least £36 million (RM241.08 million).  E&O will then end up with a 30% stake in the UK entity.

The £30.1 million amount due by the UK entity to E&O will also be settled as part of the proposed internal restructuring and initial public offering. E&O’s pro forma net gearing could improve to 38%.

We have revised down our TP to RM1.20 based on a wider 70% discount (from 50%) to a revalued net asset value of RM3.90 given looming headwinds in the property market.

The management is sticking to its three-year cumulative profit target of RM450 million for FY14 to FY16, but the weaker sentiment could make this very challenging. — AllianceDBS Research Sdn Bhd, Aug 25

This article first appeared in the digitaledge DAILY on Aug 26, 2015. Subscribe here.

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