INVESTMENT HIGHLIGHTS

• 1QFY18 core net income below expectations

• Earnings dragged by higher expenses

• 1QFY18 new sales at RM83.8m

• Maintain BUY with a revised TP of RM2.37

1QFY18 core net income below expectations. Eastern & Oriental Berhad (E&O) 1QFY18 core net income of RM13.2m was below expectations, at 13% and 14% of our and consensus full year forecast. The negative deviation was mainly due to lower than expect margin in 1QFY18.

Earnings dragged by higher expenses. 1QFY18 revenue climbed 6%yoy to RM173.4m, due to higher revenue recognition from the ongoing projects namely The Tamarind, the Amaris Terraces, and the Ariza Seafront Terrace in Seri Tanjung Pinang (STP). Besides, the higher revenue was also driven by higher sales of completed properties. Nevertheless, core net income declined 9%yoy to RM13.2m, mainly due to higher administrative expenses (+38%yoy), higher finance cost (+24%yoy), and lower contribution from joint ventures. Note that we have excluded fair value gain on investment properties and investment securities in our core net income calculation. Meanwhile, unbilled sales declined to RM739m in 4QFY17 from RM841m in 4QFY17, providing 1year of earnings visibility to property division.

1QFY18 new sales at RM83.8m. E&O recorded new property sales of RM83.8m in 1QFY18 against 1QFY17 new sales of RM115m. 87% of the total new sales were contributed by projects in Penang, 11% contributed by projects in Klang Valley while the remaining was contributed by projects in Johor. Looking ahead, launches that has planned for FY18 include phase two of Avira (GDV: RM90m) and first phase of Elmina (GDV: RM400m) while Conlay project (GDV: RM900m) may also be launched in FY18.

Maintain BUY with a revised TP of RM2.37. We cut our FY18/19 earnings by 22%/10% to factor in the higherthan-expected cost. Maintain BUY with a revised TP of RM2.37, as we trimmed our margin assumption for our RNAV valuation. We raised slightly discount to RNAV to 60% from 55% due to flattish near term earnings outlook. Nevertheless, we are positive on the long-term prospect for E&O following the entry of KWAP as strategic investor of STP2A. Besides, balance sheet of E&O is also improving with net gearing declined to 0.59x in June 2017 from 0.72x in March 2017.

Source: MIDF Research - 30 Aug 2017