INVESTMENT HIGHLIGHTS

• 9MFY17 core net income above expectations

• Earnings buoyed by higher sale of completed properties

• 9MFY17 new sales at RM256m

• Maintain Neutral with a revised TP of RM1.82

9MFY17 core net income above expectations. Eastern & Oriental Berhad (E&O) 9MFY17 core net income of RM45.3m was above expectations, at 89% and 84% of our and consensus full year estimates. The positive deviation was mainly attributed to the higher-than-expected sale of completed properties and better-than-expected margin in 3QFY17.

Earnings buoyed by higher sale of completed properties. On a sequential basis, core net income for 3QFY17 jumped 408%qoq to RM26.3m due to the increase in sales of completed properties where profit was recognized upon the sale of the project. Besides, contribution from Princes House project in UK has also help propped up earnings in 3QFY17 as Princes House project was completed. The strong earnings in 3QFY17 brought 9MFY17 cumulative core net income to RM45.3m (+312%yoy). The higher cumulative earnings were due to similar reasons and also due to higher revenue recognition from the ongoing projects in Seri Tanjung Pinang (STP) namely The Tamarind and the Amaris Terraces. Meanwhile, unbilled sales declined to RM856m in 3QFY17 from RM980m in 2QFY17, providing 2.8years of earnings visibility to property division.

9MFY17 new sales at RM256m. E&O recorded new sales of RM104m in 3QFY17, increase from new sales of RM37m in 2QFY17. That lifts total new sales in 9MFY17 to RM256m where 89% of the new sales were contributed by projects in Penang namely The Tamarind and Andorra 20. The total new sales of RM256m were within management expectation of achieving minimum property sales of RM300m for FY17. Looking ahead, we reckon property sales in 4QFY17 could be slower due to absence of property launches in 4QFY17. In 9MFY17, E&O launched Avira in Iskandar Medini (GDV: RM180m), Amaris in STP 1 (GDV: RM122m). Meanwhile, launches that has planned for FY18 include phase two of Avira (GDV: RM100m), Ariza (GDV: RM100m), and first phase of Elmina (GDV: RM340m).

Maintain Neutral with a higher TP of RM1.82. We revise higher our earnings forecast for FY17/18 by 22%/6% to account for the better-than-expected margin. We also revise upwards our TP for E&O to RM1.82 from RM1.58 after increasing our margin assumption and lowering our discount slightly to 60% from 65% of RNAV valuation. Management maintains its target timeline of securing level 1 strategic investor for STP 2 by March 2017 and we believe it would be the key catalyst for E&O as it would address the high net gearing issue of E&O.

Source: MIDF Research - 24 Feb 2017