Eastern & Oriental (E&O) reported headline net profit of RM18.8m in 3QFY20, compared to a net loss of RM12.4m in 2QFY20. However, its core net loss widened to RM4.7m in 3QFY20 compared to RM3.5m in 2QFY20 due to lower revenue. There was a reversal of an unrealised forex loss in 2QFY20 to a gain in 3QFY20 due to the weaker Ringgit against the £. However, core net profit fell 99% yoy to RM0.5m in 9MFY20 (below our expectation) due to lower revenue, an EBIT margin squeeze and a high effective tax rate. The Conlay project should drive earnings growth in FY21. We reiterate our long-term BUY call with a lower target price of RM0.80, based on a 70% discount to RNAV.

Below Expectations

E&O reported net profit of RM8.1m in 9MFY20, which was below market and our expectations. This compares to the consensus FY20 forecast of RM24.1m and our previous estimate of RM16.1m. We were surprised by the higher operating expense and effective tax rate. Revenue fell 39% yoy to RM390.6m due to lower revenue recognition for the 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 27% yoy to RM47.3m in 9MFY20 due to the closure of the E&O Hotel Heritage Wing for refurbishment; it was re-opened at end-2019.

Achieved Better Sales

E&O achieved sales of RM360m in 9MFY20 compared to RM251m in 9MFY19. The company cut the average selling price of Andaman 1G by 22% to RM1,078 psf to spur inventory sales. The Conlay luxury condominium project (gross development value (GDV) of RM968m) saw a soft launch of 297 units in 3QFY20 with about 100 units booked, mainly from overseas buyers. The Peak with GDV of RM348m is slated for launch in 2HFY21. Unrecognised revenue of RM357m from KWAP, unbilled sales of RM108m and potential inventory sales worth about RM160m will support revenue growth in FY20-21E, in our view.

Lowering Target Price

We lower our RNAV/share to RM2.70 from RM2.87 to reflect higher net debt at end-2019. Based on the same 70% discount to RNAV, we lower our 12-month TP to RM0.80 from RM0.86 previously. We maintain our long-term BUY call. Key downside risk is share overhang from its planned rights issue of new shares.

EBIT Margin Squeeze

EBIT fell 68% yoy to RM61.2m in 9MFY20. EBIT margin fell to 15.7% in 9MFY20 from 29.7% in 9MFY19. We believe this is due to the discounts offered for inventory sales. In view of the challenging property market conditions, we believe this is a preferred strategy as cash flow generation is important to sustain its operations. E&O incurred a core net loss of RM4.7m in 3QFY20, a second consecutive quarterly loss (RM3.5m loss in 2QFY20) on lower revenue and an EBIT margin squeeze.

Gearing Up for New Reclamation Works

Net gearing increased to 0.36x at end-3QFY20 from 0.24x at end-1QFY20 with the payment to complete the STP2A reclamation. E&O refinanced its bank loans for the STP2A project with a 25-year Sukuk bond issuance (nominal value of RM1.5bn) to reduce interest rates and finance its plan to reclaim 100 acres out of a total 507 acres in STP2B and STP2C going forward. It is positive to note that the Penang state government has granted an extension of time for E&O to complete the reclamation of STP2B and STP2C to 2028 from 2022 previously.

Source: Affin Hwang Research - 19 Feb 2020