INVESTMENT HIGHLIGHTS

• 1QFY20 earnings below expectations

• CNI for the quarter fell 61%yoy to RM8.7m

• Earnings forecast lowered by 22% to RM66m for FY20F

• Maintain NEUTRAL with an adjusted TP of RM0.75

1QFY20 earnings within expectation. Eastern & Oriental Berhad (E&O) 1QFY20 core net income (CNI) of RM8.7m was below ours and consensus’ estimates, making up 10% and 12% of full year forecast respectively.

CNI for the quarter fell 61%yoy to RM8.7m as revenue declined by 33%yoy to RM134.6m mainly due to slower progress billing from the property segment. During 1QFY19, the property segment recognised lower revenue from the reclaimed land in STP2A and the development projects in STP1, Tamarind and Ariza, which have been completed. Revenue for the property segment slid 33%yoy to RM119.6m. As a result, operating profit for the property division declined by 24%yoy to RM44.4m. Meanwhile, revenue for the hospitality segment dropped by 31.5%yoy to RM13.7m due to the closure of Heritage Wing at E&O Hotel, Penang for refurbishment since March 2019. That led to an operating loss of RM2.6m for the hospitality segment from an operating profit of RM0.88m in the previous corresponding quarter.

1QFY20 new sales at RM79.5m. E&O’s new property sales for the quarter was marginally lower from the RM80m recorded in 4QFY19. Penang contributed to 94% of E&O’s total new sales while Klang Valley and Johor contributed 3% each. Meanwhile, unbilled sales stood at RM61.3m. Looking ahead, the group targets to launch The Conlay and The Peak in the Klang Valley with a combined GDV of more than RM1b in FY20F. The company is also preparing for a maiden launch of STP2A in Penang in the second half of 2020.

Earnings forecast lowered by 22% to RM66m for FY20F as we factor in slower progress billing from property sales. On top of that, we have also anticipated lower profit margin in view of lower sales from both the property and hospitality divisions.

Maintain NEUTRAL with an adjusted TP of RM0.75 (previously RM0.88). Due to weaker-than-expected earnings visibility, we have widened our RNAV discount from 75% to 79%. We are still Neutral on E&O as we expect its near-term prospects to be lacklustre.

Source: MIDF Research - 28 Aug 2019