2QFY20: Surprise Loss

Eastern & Oriental (E&O) reported a surprise loss of RM12.4m in 2QFY20, mainly due to an unrealised forex loss of RM16.3m on £- denominated receivables. Core net profit plunged 82% yoy to RM5.8m in 6MFY20 on the back of lower revenue and high effective tax rate. We cut our FY20E core EPS forecast by 51% to reflect lower progress billings on land sales to KWAP. We reiterate our BUY call with a lower target price (TP) of RM0.86, based on higher discount to RNAV of 70% to reflect execution risk for its proposed rights issue.

Incurred Loss in 2QFY20

E&O’s net loss of RM10.7m in 6MFY20 was a surprise compared to fullyear consensus and our previous net profit forecasts of RM55.6-57.2m. Revenue fell 29% yoy to RM271.4m due to lower revenue recognition for Seri Tanjung Pinang Phase 2A (STP2A) reclaimed land sold to KWAP and STP1 projects. Its Tamarind and Ariza projects in STP1 were completed in FY19. Hospitality revenue fell 32% yoy to 28.9m due to the closure of the E&O Hotel Heritage Wing for refurbishment since March 2019, which will be re-opened in December 2020.

Clearing Inventories and New Launches to Drive Sales

E&O remained focused on selling its completed and unsold units worth RM136m (market value of RM249m) as at end-2QFY20, which was reduced from a high of RM455m in FY17. There were no new property project launches in 1QFY20. EBIT fell 44% yoy to RM48.4m in 6MFY20, mainly due to lower revenue and EBIT margin. EBIT margin narrowed to 17.8% in 6MFY20, compared to 22.8% in 6MFY19 as E&O reduced prices of its unsold units to clear inventories.

Lowering Target Price

We revise our RNAV/share to RM2.87 from RM2.85 to reflect the accelerated sales and progress billings for STP1. Based on a higher 70% discount to RNAV (increased from 60% previously), we lower our TP to RM0.86 from RM1.14 previously. The fall in share price to below its proposed rights issue price of RM0.60 has elevated the execution risk for its proposed 1-for-4 rights issue of new shares with warrants (1 warrant for every 2 right shares subscribed). Maintain our long-term BUY call given the current sharp 80% discount to RNAV. Key risk is share overhang from its planned rights issue of new shares to complete by end-2019.

Source: Affin Hwang Research - 29 Nov 2019