Eastern & Oriental (E&O) reported a surprise net loss of RM8.8m in 3QFY19, mainly due to an exceptional loss of RM46.1m and unrealised forex loss of RM11.7m. But core net profit grew 20% yoy to RM81.6m in 9MFY19, which was above our expectation. We gather that E&O is close to securing a strategic partner to take up the private placement of new shares up to 10% of share capital. We upgrade our core EPS forecasts by 50% in FY19E to reflect the higher progress billings on the Seri Tanjung Pinang Phase 2A (STP2A) land sale. We reiterate our BUY call with RM1.55 target price, based on 50% discount to RNAV.

Below Expectations

E&O’s headline net profit of RM24.2m in 9MFY19 was below market and our expectations; comprising 27% of consensus full-year forecast of RM88.6m and 36% of our previous estimate of RM67.7m. We were surprised by the RM44.6m one-off provision for holding cost relating to an option to purchase land which has lapsed, and the unrealised forex loss of RM11.7m. Revenue fell 9% yoy to RM636.3m as revenue recognition on ongoing projects are near completion and sales of completed properties in STP1 were lower. But core net profit increased 20% yoy to RM81.6m in 9MFY19 due to better cost management in the reclamation works for STP2A.

Slower Sales

E&O achieved sales of RM250.9m in 9MFY19, slightly higher compared to RM235.7m in 9MFY18. Unbilled sales stood at RM282.4m as at 31 December 2019 as there were no new project launches. E&O remained focused on disposing its inventories, fell 28% to RM232.4m in 9MFY19.

Fund Raising to Strengthen Financial Position

E&O expects to complete the approved private placement in 1Q19 and is close to securing a strategic partner to take up new shares up to 10% of share capital and subscribe for the rights issue subsequently. This will support E&O’s plan to raise at least RM250m from the equity issuances to strengthen its financial position and accelerate the development of STP2.

Maintain BUY

The potential share overhang from the proposed fund raising remains a key concern. But we believe this is reflected in the current share price, which is trading at Price/RNAV of 0.3x and Price/book of 0.6x. Maintain BUY.

Source: Affin Hwang Research - 25 Feb 2019