Eastern & Oriental’s (E&O) posted a net profit of RM62.9m (+65% yoy) for 9MFY18, which was within market expectations but below our estimate (accounting for only 38% of FY18E’s net profit) as we were expecting a higher recognition of land sale gain of RM239m for the KWAP deal involving STP2A. We maintain our BUY call on E&O but with a lower TP of RM2.90 (from RM3.04), adjusting for the delayed revenue recognition in STP2A.

Land Sale Gain of STP2A Started to Contribute to Property Segment

9MFY18 revenue surged 44% yoy to RM701m mainly driven by the RM188.4m or 20% land sale gain of Seri Tanjung Pinang Phase 2A (STP2A) to KWAP, encouraging sales from completed properties (Princes House, London) and steady progress billings on ongoing projects (The Tamarind, Amaris Terraces and Azira Seafront Terraces Phase 2 in Seri Tanjung Pinang Phase 1 (STP1).

Margins Showed Improvements But Mainly Due to Disposals

Property development operating margin improved 3.7ppts which translated to the group’s EBITDA margin improvement to 26.4% (+5.5ppts yoy) in 9MFY18. Meanwhile, EBIT (RM172.1m) saw a higher growth yoy (+97%) due to a one-off disposal gain (RM25.3m) of E&O Express (EOE) for the same period.

Lower Core Earnings Due to Impairments

For 9MFY18, E&O achieved higher pre-tax profit of RM134.4m (+102.4% yoy) driven by higher property segment operating profit (+77% yoy). However, net profit increased only by 65% yoy to RM62.9m, which was offset by higher financing costs (+13.9% yoy) and lower contribution from joint ventures (-94% yoy) following the completion of The Mews and Avira Garden Terrace Phase 1. E&O’s core earnings increased by a smaller percentage (37% yoy) due to impairment write-down of SQ Mall (RM30m).

Tweaked Our Earnings Estimates

We have reduced our FY18E EPS by 35.3% to 7.8sen and increased FY19E EPS to 14sen (+40.8%) assuming the land sale gain of STP2A is differed to FY19E (our assumption: 20/80% gain in FY18/19E), while leaving FY20E unchanged. We maintain BUY with a lower TP of RM2.90 (based on an unchanged 50% discount to RNAV) at this juncture, pending a comprehensive meeting with the management. Key downside risk is the execution risk for its STP2A project and ability to find a good partner with commercial development expertise.

Source: Affin Hwang Research - 13 Feb 2018