Eastern & Oriental’s (E&O) 1HFY18 net profit was within market expectation but below ours. Net profit of RM41m (+479%) tracked below our RM166m full-year (FY) forecast as the potential land sale gain of RM239m for the KWAP deal will only be booked from 4QFY18. Core net profit of RM28m (+43% yoy) in 1HFY18 was in line with our FY forecast of RM57m. E&O is one of our top BUYs in the property sector with a TP of RM3.04, based on a 50% discount to RNAV.

Surge in EBIT

Revenue jumped 57% yoy to RM243m in 1HFY18, driven by progress billings on ongoing projects (The Tamarind, Amaris Terraces, Ariza in Seri Tanjung Pinang Phase 1 (STP1)) and the sale of completed units for its Andaman, Andorra and Princes House projects (15% of revenue). EBIT surged 114% yoy to RM75m driven by higher revenue and an improved profit margin due to contribution from high-margin products. PBT increased nearly 3-fold to RM67m, lifted mainly by the forex gain of RM9m in 1HFY18 compared to a forex loss of RM15m in 1HFY17. Net profit fell 8% qoq to RM20m due to lower one-off gains despite the higher EBIT (+5% qoq) in 2QFY18, which was driven by higher revenue (+13% qoq).

Sustained Similar Sales Yoy

E&O continues to focus on selling its completed units to reduce inventories worth RM434m. Sales achieved was RM150m in 1HFY18, sustaining similar sales of RM152m in 1HFY17. There were no new launches in 1HFY18, but E&O plans to launch new phases for Avira Terraces in 2HFY18. Unbilled sales of RM622m will likely support forward earnings.

Improved Financial Position and Potential Earnings Upside

Net gearing improved to 0.58x in 2QFY18 compared to 0.70x in 4QFY17 due to the operating cash inflow and RM116m from the issuance of 63m shares to KWAP. We maintain our earnings forecasts but there is potential upside to our FY18E EPS if more gains from the land sale to KWAP were recognized earlier and the gain from land sale in Kuala Lumpur (RM20- 30m) were realized (not in our forecast currently).

Maintain BUY

We see potential share price catalysts from the strong earnings prospect and potential new foreign strategic partner for STP2A, likely to be secured in FY18. Maintain BUY. Execution risk for the STP2A project is the key risk to our positive call and above-consensus earnings forecasts.

Source: Affin Hwang Research - 15 Nov 2017