INVESTMENT HIGHLIGHTS

• 1HFY19 earnings below expectations

• Earnings helped by STP2A land sales

• 1HFY19 new sales at RM151m

• Maintain BUY with a revised TP of RM1.65

1HFY19 earnings below expectations. Eastern & Oriental Berhad (E&O) 1HFY19 core net income of RM32.6m came in below expectations, making up 28% of our and consensus full year estimates. The negative deviation could be attributed to lower property sales and weaker project billing from projects in 2QFY19.

Earnings helped by STP2A land sales. 1HFY19 core net income increased by 12.7%yoy to RM32.6m, mainly helped by earnings recognition from the sale of 20% reclaimed land in Seri Tanjung Pinang (STP) 2A project to KWAP and sales of completed projects. That has helped mitigated the weaker earnings recognition from its on-going property projects. Meanwhile, unbilled sales declined to RM399m in 2QFY19 from RM462.9m in 1QFY19, providing less than 1 year of earnings visibility.

1HFY19 new sales at RM151m. E&O registered new property sales of RM71.8m in 2QFY19, lower than new sales of RM79.2m in 1QFY19. 59% of the total new sales in 1HFY19 were contributed by projects in Penang, 20% contributed by projects in Klang Valley, 14% contributed by projects in Johor while the remaining was contributed by projects in UK. Meanwhile, E&O plans to launch projects with total GDV of RM1.5b in the next two years. Projects in the pipeline are The Conlay (GDV: RM900m), The Peak (GDV: RM278m) and maiden launch of high-rise project on Plot 14 of STP2A (GDV: RM380m). Soft launch of The Conlay is expected to take place in 4QFY19.

Maintain BUY with a revised TP of RM1.65. We cut our FY19/20 earnings forecast by 18%/6% to take into account of the lower project billing. Correspondingly, we cut our TP for E&O to RM1.65 (previously: RM2.37) as we updated our RNAV figures to 2QFY19 figures and widen our RNAV discount to 65% from 58% in view of the weaker earnings visibility. Nevertheless, we maintain our BUY call on E&O due to deep value in STP2A. Prospect for STP2A project remains unchanged whereby STP2A island is 95% reclaimed while maiden project launches on STP2A would take place next year.

Source: MIDF Research - 12 Nov 2018