E&O’s 1HFY19 result was below market and our expectations. Net profit fell 19% yoy to RM32.9m, mainly due to lower exceptional and forex gains. Good progress in reducing its inventories especially for its remaining unsold units in Seri Tanjung Pinang Phase 1 (STP1). It is preparing to launch The Conlay in mid-2019. We cut our EPS forecasts by 36-40% in FY19-21E to reflect slower new launches and lower profit margins. We cut our TP to RM1.55 from RM2.38 after reducing our RNAV/share. Current deep value lead us to reiterate our BUY call.

Below Expectations

E&O’s net profit of RM33m in 1HFY19 comprises 28% of full-year consensus and our forecasts of RM115-116m. We were surprised by the weak sales and share of loss for its Avira project joint venture (JV). Revenue increased 3% yoy to RM379m in 1HFY19, driven by billings for deemed reclaimed land sale at STP2A to KWAP and sale of completed units in its inventories, especially Andaman condominium in STP1. Its inventories have reduced to RM262m in 2QFY19 from a high of RM537m in 2QFY16.

Higher Core Net Profit

1HFY19 core net profit was up 18% yoy to RM32.6m on the back of lower operating expenses. RM6.8m share of JV loss for its Avira project held back the core earnings rebound. E&O incurred higher marketing expenses to market the project in China, which led to successful sale of 50 of 70 units launched. E&O achieved RM151m sales in 1HFY19 with remaining unbilled sales of RM399m to support future earnings.

New Launches Delayed

The Conlay luxury condominium project with estimated gross development value (GDV) of RM900m is slated for launch in mid-2019, delayed in view of the weak market conditions and design changes. The Peak luxury homes (GDV of RM278m) and Plot 13A condominium (GDV of RM380m) at its STP2A project are planned for launch at end-2019.

BUY With Lower TP of RM1.55

We reduce our RNAV/share estimate for E&O to RM3.11 from RM4.76, mainly to reflect lower profit margin and delay in launches. Based on the same 50% discount to RNAV, we cut our TP to RM1.55 from RM2.38 previously. We retain a BUY call on E&O given attractive Price/RNAV of 0.36x and good long-term prospects for its STP2A project.

Source: Affin Hwang Research - 12 Nov 2018