Eastern & Oriental’s (E&O) 1QFY18 result was below market expectations but above ours. We were surprised by the fair value and unrealised forex gains that spurred net profit to surge 2-fold yoy to RM21.3m in 1QFY18. Core net profit saw slower growth of 5% yoy to RM12.5m. We lift our EPS forecasts by 46-162% in FY18-20E to reflect land and investment property sale gains, and dilution from 63m new shares issued to KWAP. E&O is one of our top property stock BUYs with lifted TP of RM3.04, based on 50% discount to RNAV.

Surge in Earnings

Revenue sustained the growth trajectory at 47% yoy to RM173.4m in 1QFY18 driven by higher progress billings for its ongoing projects, ie, The Tamarind, Amaris Terraces and Ariza Seafront Terrace in Seri Tanjung Pinang Phase 1 (STP1). Higher sales of completed properties also contributed to the revenue boost. Overall 1QFY18 EBITDA margin improved 3.8 ppt to 23.7% driving PBT to surge 228% yoy to RM34.9m in 1QFY18. Net profit surged more than 5-fold to RM21.3m in 1QFY18, boosted by fair value and unrealised forex gains amounting to RM8.8m. Higher tax expense (effective tax rate of 34.6%) led to a 13% yoy contraction in core net profit. This is in line with our expectation of a 14% yoy decline in net profit to RM75.1m in FY18E.

Focus on Sale of Completed Units

E&O continues to focus on selling its completed units to reduce inventories worth RM460m. For its joint venture projects, The Mews in Kuala Lumpur and Avira Terraces is Iskandar Puteri led to lower revenue in 1QFY18. E&O plans to launch more units of Avira Terraces in FY18.

TP and Earnings Upgrade

We upgrade our EPS by 46-162% in FY18-20E to reflect the potential RM243m land sale gain for the proposed sale of 1.45m sq ft net land in STP2A to KWAP. E&O has also agreed to sell its Lone Pine Hotel for RM85m, which will allow the company to realise a net gain of RM23.3m.

We lift our RNAV/share to RM6.08 from RM6.00 to reflect the impact of the deals. Based on the same 50% discount to RNAV, we lift our TP to RM3.04 from RM3.00. Maintain BUY. Execution risk for the STP2A project is the key risk to our positive call and above-consensus earnings forecasts.

Deal Approved

The proposed sale of 1.45m sq ft net land in Seri Tanjung Pinang Phase 2A (STP2A) to KWAP for RM766m has been approved by shareholders on 7 August 2017. The deal also involves KWAP taking a 20% stake in the STP2A development and 63m new E&O shares (5% stake) at RM1.84. The reclamation of STP2A is progressing well with 75% of the island above 2 meter chart datum level. This enables E&O to apply for titles and facilitate progressive payments from Kumpulan Wang Persaraan (KWAP). We assume the potential land sale gain of RM243m will be recognised over the next three years, ie, FY18-20E.

Source: Affin Hwang Research - 30 Aug 2017