Eastern & Oriental (E&O) reported a surprise loss of RM196m in FY20, mainly due to impairment of assets. We estimate core net profit was RM34m in FY20, down 78% yoy on lower contribution from the KWAP deal. The government’s restriction on foreign tourists due to the COVID-19 pandemic adversely impacted its property progress billings and hospitality business. Potential land sales will likely contribute oneoff gains of RM40m to support our revised FY21E net profit of RM51m. Our BUY call on E&O is on valuation grounds with a Price/RNAV at 0.1x. Our TP remains at RM0.54, based on an 80% discount to RNAV.

Surprise Loss

E&O had a FY20 net loss of RM196m, vs. consensus and our net profit of RM8-11m. Core net profit of RM34m in FY20 was above our forecast of RM4m. Revenue fell 45% yoy to RM487m in FY20 on lower contribution from land sales to KWAP (RM50m recognised) and lower sales of inventory. Progress billings on the KWAP land sales reached 53.5% or RM410.5m at end-FY20. Its Tamarind and Ariza projects in Seri Tanjung Pinang Phase 1 (STP1) were completed in FY19. Hospitality revenue fell 25% yoy to RM63m in FY20 given closure of the E&O Hotel Heritage Wing for refurbishment; it re-opened at end-2019 but was closed again due to the MCO in March-May.

Achieved Better Sales

E&O achieved pre-sales of RM495m in FY20 vs. RM331m in FY20. The Conlay luxury condominium project (gross development value [GDV] of RM968m) saw a soft launch of 297 units in 3Q FY20 with about 52 units worth RM107m pre-sold as at end-March. The Peak luxury homes with GDV of RM348m and affordable serviced apartments with GDV of RM650m in STP2A are slated for launch in 2H FY21. Unrecognised revenue of RM356m from KWAP (about RM138m billed to be recognised in FY21), unbilled property sales of RM150m and potential inventory sales worth about RM92m will support revenue growth in FY20-21E, in our view.

BUY on Valuation Grounds

FY21 prospects remain challenging for E&O due to the adverse impact of COVID-19 on its property sales (especially demand from foreigners) and hospitality business. We reaffirm our BUY rating and 12-month TP of RM0.54, based on an 80% discount to RNAV. Downside risk: a prolonged downturn in the property market

Source: Affin Hwang Research - 30 Jun 2020