Eastern & Oriental (E&O) recorded a 3QFY22 net profit of RM7.8m, swinging back from the net loss of RM14.0m a quarter ago, with better margins achieved and improvements in the hospitality segment with the lifting of travel ban for local tourists. The hospitality segment’s performance was also bolstered by a one-off recognition on gain on lease modification of RM9.3m during the quarter, and waiver of rental of RM11.8m. Taking out these one-off items, Group net loss YTD is estimated at RM25.7m, which is 61% and 50% of our and consensus forecast. As mentioned earlier, we only expect the Group to see earnings recovery in FY23, underpinned by projects such as STP2A (maiden launch, “The Meg” was soft-launched recently) and The Peak (JV with Mitsui Fudosan, RM348m GDV. We adjust FY22 earnings upwards by 54% to account for one-off gains and nascent recovery for the hospitality segment. Separately, the Group has also proposed a rights issue of ICULS (1 ICULS for every 2 existing ordinary shares in E&O) to raise between RM178m and RM363m, mainly to be used for existing and future projects. Pending the completion, we maintain our Neutral call with TP unchanged at RM0.60, pegged at ~70% discount to RNAV, excluding STP2B&C.

• 3QFY21 Group revenue dropped 36% YoY due mainly to the absence of new launches, and also slower-than-expected sales in on-going projects (mainly Conlay, KL). The properties segment recorded a drop of 56.3% YoY to RM65.8m, primarily due to a sale of land of RM55.0m last year and lower sales of completed properties YTD. Meanwhile, the hospitality segment recorded revenue of RM16.6m or increase of 25.8% YoY due to higher revenue generated following the lifting of interstate travel ban for local tourists. The segment recorded an operating profit of RM10.8m YTD, mainly lifted by the recognition of gain on lease modification of RM9.3m and waiver of rental of RM11.8m.

• Proposed rights issue. The Group proposed a renounceable rights issue of up to RM363m in nominal value of 5-year 3.80% irredeemable convertible unsecured loan stocks (ICULS) at 100% of their nominal value of RM0.50 each, on the basis of 1 ICULS for every 2 existing ordinary shares in E&O. Assuming maximum scenario, it plans to utilize 80% of the proceeds to embark on several new development projects and reclamation of Andaman Phase 2B and 2C. We understand that the fixed funding cost of 3.8% per annum (p.a.) is comparable to the Group’s current average borrowing cost of 3.77% p.a. The exercise is expected to be completed by 4QCY22.

Source: PublicInvest Research - 24 Feb 2022