- We maintain our BUY call on Eastern & Oriental (E&O) with our fair value tweaked slightly downwards to RM2.76/share (50% discount to our FD NAV) to factor in a downward revision in our earnings forecast post the release of it 1HFY16 results.

- Stripping off a gain on a land sale in the previous quarter, we estimate 1H core earnings to have risen by 27% YoY to RM25mil. No dividends were declared during the quarter.

- 1HFY16 property development billings fell 36% YoY following the completion of two blocks of Andaman condominiums in STP1 during the previous FY. At the same time, contributions from newer projects (e.g. Amaris, The Mews, The Tamarind and Princes House) are still at the early stages (completion rate: 7%-31%).

- While revenue was flattish, the hospitality division managed to chalk up a marginal improvement; it achieved an operating profit of RM1.3mil against a small loss of RM0.5mil a year ago.

- 1HFY16 new property sales stood at RM635mil vs the RM940 achieved in FY15 (unbilled sales: RM825mil). For the next six months, E&O is looking to launch three projects with a combined GDV of RM662mil. They are Avira Phase 2, The Tamarind B & Link Villa 20. We understand that The Tamarind B will be priced between 5%-8% higher compared to the initial block.

- More importantly, management remains confident of securing healthy take up rates of 70%-80% for these projects, generating potential new sales of RM512mil.

- STP2 is progressing well; E&O is set to sign the project’s syndicated term loans worth RM1.1bil before reclamation works commence by year-end. From here, management is looking to secure Level 1 investors by year-end.

- The proposed listing of E&O’s UK unit is slated to complete by March 2016. Such a move would help E&O raise RM82mil, and reduce its debts by another RM358mil. Despite the huge capex requirements for STP2, the group is looking to keep its net gearing below 1x (30 September: 0.7x).

- Despite our earnings downgrade, our fair value is largely unchanged at RM2.76/share – as STP2 still accounts for a bulk of E&O’s NAV at 82%. The crystallisation of STP2 is a key primary driver of E&O, and will help narrow the steep 72% the stock trades against its NAV.

Source: AmeSecurities Research - 30 Nov 2015