Eastern & Oriental’s (E&O) FY19 core net profit surged by 43% yoy to RM151m, which was above our expectations. But, it recognised net exceptional loss of RM89m, mainly due to impairment of land, fittings and inventories, and unrealised forex loss. As a result, net profit fell 34% yoy to RM62m in FY19. We cut our FY20-21E core EPS forecasts by 1-4% to reflect higher interest expense due to adoption of new accounting standard. We reiterate our BUY call with lower target price (TP) of RM1.18, based on a 60% discount to RNAV.

Strong Core Earnings Growth

E&O’s net profit of RM62m in FY19 was below market consensus forecast of RM92m but above our estimate of RM52m. But core earnings jumped 43% yoy to RM151m, driven by sale of inventories that generated high profit margins. Revenue declined 10% yoy to RM886m as both its property development (-9% yoy) and hospitality (-15% yoy) divisions posted lower revenue. EBIT grew 19% yoy to RM303m due to lower cost and highmargin product mix. EBIT margin improved to 34.2% in FY19 from 27.4% in FY18.

Clearing Inventories and New Launches to Drive Sales

E&O achieved RM330.8m sales in FY19 with Penang properties contributing 63% of total sales. Unbilled sales was at RM61.3m at endFY19. This excludes unbilled land sales in Seri Tanjung Pinang Phase 2A (STP2A) of RM250m to KWAP. It also has inventories with book value of RM216m at end-FY19, a sharp reduction from the peak of RM457m at end-FY17. Future sales will be driven by E&O’s focus on clearing its inventories with gross development value (GDV) of RM450m in the immediate term. Planned new launches are The Conlay (GDV of RM945m) in Aug/Sep 2019 and The Peak (GDV of RM397m) in Mar/Apr 2020.

Lowering Target Price

We reduce our core EPS by 1-4% in FY19-20E to reflect higher interest expense as E&O has adopted the new MFRS 123 that stipulates noncapitalisation of interest expense in inventories. We revise up our RNAV/share to RM2.96 from RM2.88 after rolling forward our valuation base year to FY20E. Based on a higher 60% discount to RNAV (30% previously), we lower our TP to RM1.18 from RM1.44. Maintain BUY. Key risk is share overhang from its planned rights issue of new shares in 3Q19.

Source: Affin Hwang Research - 27 May 2019