E&O’s 1QFY19 result was below expectations due to weak sales and unrealised forex losses. Core net profit jumped 40% yoy to RM23m in 1QFY19, lifted by land sale gains. But net profit declined 34% yoy to RM14m in 1QFY19 due to unrealised forex loss. We cut our EPS forecasts by 21-34% in FY19-21E to reflect slower recognition of land sale gains to KWAP and lower property sales. We reiterate our BUY call with a reduced RM2.38 TP, based on a 50% discount to RNAV.

Below Expectations

E&O’s net profit of RM14m in 1QFY19 only comprised 9-10% of consensus full-year forecast of RM134m and our previous estimate of RM153m. We were surprised by the weak sales and unrealised forex loss of RM8.9m (weaker £ against RM led to translation loss on UK receivables) in 1QFY19.

This Note Marks a Transfer of Coverage.

Higher Core Net Profit

Revenue increased 15% yoy while core net profit was up 40% yoy, driven by land sale gains from the disposal land to KWAP, sale of completed properties and progress billings for ongoing projects. We gather that about 46-47% of the land sales to KWAP have been recognised as revenue. But cash proceeds of about RM536m (70% of proceeds) has reduced E&O’s net gearing to 0.36x in 1QFY19 from 0.61x in 4QFY18.

Slower Sales in 1QFY19

E&O saw slower sales in 1QFY19 at RM79m due to the political uncertainties arising from the 14th General Election affecting property market sentiment. But sales should pick up in subsequent quarters with new project launches such as The Peak, Damansara Heights (GDV of RM280m) and Conlay Tower (GDV of RM880m). Unrealised sales of RM463m will also contribute to revenue over the next 2-3 years.

BUY With Lower TP of RM2.38

We reduce our RNAV/share estimate for E&O to RM4.76 from RM5.29, mainly to reflect lower estimated GDV for STP2 in view of lower prices for high-end properties (RM40bn instead of RM50bn previously). Based on the same 50% discount to RNAV, we cut our TP to RM2.38 from RM2.64 previously. We retain a BUY call on E&O given attractive Price/RNAV of 0.3x and its STP2 project will benefit from higher infrastructure spending expected in Penang to improve the road and public transportation networks.

Penang Projects Is Still the Main Revenue Contributor

Revenue grew 15% yoy to RM200m, mainly due to (1) revenue recognition from the sale of 20% of the total reclaimed land in Seri Tanjung Pinang Phase 2A (STP2A) to KWAP, (2) higher sales of completed properties in STP1 (Andaman Condominiums) and (3) progress billings for ongoing projects such as Tamarind and Ariza Seafront Terrace.

Source: Affin Hwang Research - 27 Aug 2018