E&O’s  2QFY14  results  were  below  expectations.  The weaker  earnings were mainly due to its current projects being still at their early stages of construction.  Property sales are expected to improve further in 2HFY14 from MYR350m currently as a few key projects will be rolled out from this  month  onwards.  Despite  the  negative  impact  of  recent  cooling measures, our Trading Buy call is mainly driven by the STP2.

• Below expectations. When annualised, E&O’s 2QFY14 results came in below  our and  market  expectations.  The  weaker  earnings were  mainly due to the  fact that  construction  on  The Mews  is  still in the early stage, as well as slower progress billings for its Andaman project.
• MYR350m new sales in 1HFY14. New property sales in 1HFY14 totaled MYR350m  vs  MYR95m  in  1Q.  The  key  contributors  were  Andaman Block 1 & 2 as well as The Mews, for which E&O achieved a take-up rate of  70%.  We expect sales to come in  stronger  in the coming quarters as Andaman  Block  3,  Avira  Medini  and  London  Princes  House  will  be officially launched/previewed  from  this month  onwards.  Meanwhile, E&O just held a preview of  Andaman Block 3  overseas  at an ASP that  is now higher at MYR1,700 psf  vs Block 2’s MYR1,400 psf.  Some 208 units of terrace homes in Avira are slated for launch in Dec ember at an indicative price  of  below  MYR1.5m  each  (or  about  MYR600  psf).  The  units  are almost  fully  furnished  except  for  loose  furniture.  Given  the  backing  of Khazanah/Temasek and the  project’s  concept,  we believe that  demand will still be strong in spite of recent regulatory measures.
• Forecasts.  We lower our earning forecasts by 7% for FY14 a nd 2% for FY15  due  to  the  delay  in  launches.  FY15  earnings  will  be  stronger  as earthworks  for  Avira,  The  Mews  and  Andaman  have  all  begun.  The unbilled sales currently stand at MYR800m, up from MYR550m in July.
• STP2  the key catalyst.  Although E&O will be negatively affected by the cooling measures, we believe that company-specific factors will drive the stock’s valuations. We keep our TRADING BUY call and MYR2.70 FV, at a  35%  discount  to  RNAV.  The  potential  approval  for  the  Seri  Tanjung Pinang 2  (STP2)  project in 2Q14 remains the  stock’s  key  catalyst.  The detailed environmental impact assessment report is  being finalised  and expected  to  be  submitted  by  end-2013.  Also,  given  the  shareholding structure,  a  potential  takeover  by  Sime  (SIME  MK,  BUY,  FV  = MYR10.73) is always a wild card, in our view.

Financial Exhibits

SWOT Analysis

Company Profile

E&O is a niche developer focusing on the high-end property development  with its flagship project  being  Seri Tanjung Pinang 1.  The company’s landbank is also located in KL and Iskandar.

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Source: RHB