• E&O incurred net loss of RM3.3m in 1QFY21, mainly due to unrealised forex loss of RM5.9m. Core net profit fell 35% yoy to RM5.8m in 1QFY21 due to operational disruptions caused by the Movement Control Order (MCO).
• We deem the results within our expectations as we expect a recovery in earnings in subsequent quarters as operations resumed since mid-May.
• We maintain our earnings forecasts and long-term BUY call on E&O with 12- month target price (TP) of RM0.54. Current Price/book of 0.3x is attractive.

Adversely Impacted by MCO

E&O reported net loss of RM3.3m in 1QFY21 compared to net loss of RM204m in 4QFY20 and net profit of RM1.7m in 1QFY20. The results were below market expectations with full-year consensus net profit forecast at RM25.2m. Revenue fell 48% yoy and 27% qoq due to lower revenue contribution from the Seri Tanjung Pinang Phase 2A (STP2A) land sale to KWAP, lower inventory sales and fall in hospitality segment revenue as E&O Hotel and E&O Residence (EOR) were closed during the MCO. E&O has decided to close EOR permanently due to difficult business conditions and made a one-off provision of RM5m in 1QFY21. Excluding the provision and net exceptional and forex losses, core net profit was RM5.9m in 1QFY21. We cut our net profit forecast by 18% to RM42.1m in FY21 to reflect these exceptional losses.

Slow Sales

E&O achieved sales of RM88.4m in 1QFY21, mainly contributed by the disposal of Liew Weng Chee land totalling RM55m. Property sales were slow in 1QFY21 as its sales galleries were closed during the MCO. Unbilled sales of RM142.9m will progressively be recognised over FY21-24. There will be revenue of RM88m to be recognised from the disposal of land to a joint venture company with Mitsui Fudosan for The Peak luxury residences project slated for launch in 2HFY21. The project’s gross development value (GDV) is RM348m. The maiden launch of serviced apartments in STP2A is also scheduled in 2HFY21 with GDV of RM650m.

Long-term BUY

Prospects for E&O remain challenging as its hospitality operation is expected to see a slow recovery since foreign tourists are still barred from entering the country due to the Covid-19 pandemic. Land sales and disposal of inventories are expected to support earnings in FY21E, while the launch of new projects will drive earnings growth in FY22E. Maintain our long-term BUY call with TP of RM0.54, based on 80% discount to RNAV. Downside risk: a prolonged downturn in the property market.

Source: Affin Hwang Research - 28 Aug 2020