• Core net loss widened to RM18.5m in 9MFY21 due to weaker revenue and losses for its hospitality business, lower gains from the sale of land and inventories. We revise FY21E to a core net loss of RM31.8m and cut FY22- 23E core net profit by 12-19%.
• Unrealised forex gain of RM18.3m from the strengthening of £ against RM and net exceptional gain of RM2.2m more than offset the core net loss; leading to a headline net profit of RM2m in 9MFY21.
• Prospects remain challenging in 4QFY21 due to the Movement Control Order (MCO) 2.0. We downgrade our call to HOLD from Buy with a lower TP of RM0.44, based on an 80% discount to our reduced RNAV.

Core Net Loss Surprise

E&O’s reported core net loss of RM18.5m in 9MFY21, which was a negative surprise compared to consensus FY21E net profit of RM15.5m and our previous FY21E core earnings of RM11m. The launch of Conlay luxury condominium saw a low take-up rate of 27% due to travel bans impeding sales to foreign buyers. Coupled with lower sale of inventories and lower revenue recognition of Seri Tanjung Pinang Phase 2A (STP2A) reclaimed land sales to KWAP, property development revenue and EBIT fell 56% yoy and 36% yoy respectively in 9MFY21.

Hospitality Division Incurred Losses

Hospitality revenue plunged 42% yoy in 9MFY21 due to low E&O Hotel occupancy of 27.5% in 9MFY21 (travel ban and MCO impact) and the closure of E&O Residence. This led to an operational loss of RM27.4m in 9MFY21 for the hospitality division. Group revenue fell 58% yoy to RM166m in 9MFY21.

Downgrade to HOLD

E&O achieved RM193m sales (including sale of Liew Wen Chee land for RM55m) in 9MFY21, lower compared to RM360m in 9MFY20. Property development sales were slow due to weak market sentiment and lower foreign demand for its luxury products due to the Covid-19 pandemic and travelling restrictions. Unbilled sales of RM144m will be progressively recognised over FY21-24. Deemed partial land disposal of The Peak to a proposed joint venture with Mitsui Fudosan will lift its bottom line in 4QFY21. We cut our RNAV/share to RM2.20 from RM2.68 to reflect lower STP2 valuation. Based on the same 20% discount to RNAV, we cut our TP to RM0.44 from RM0.54. Downgrade our call to HOLD from Buy. Key upside/downside risks are recovery/weakness in demand for luxury homes.

Source: Affin Hwang Research - 24 Feb 2021