In line with our sector downgrade (to NEUTRAL), we downgrade E&O to NEUTRAL  with  a lower  TP  of MYR2.27 (10.7% upside). The company’s high exposure to the high-end, high-rise segment makes it vulnerable to a  slowdown  in  economic  growth.  The  catalyst  of  a  RNAV  rerating arising from a potential sale of land in STP2, which is crucial in helping to partially fund reclamation works, may only come in 2Q15.  
 
Sector  downgrade.  We  have  downgraded  the  property  sector  to NEUTRAL. We  expect  property  transaction  volumes to decline  3-5% in 2015  on  the  back  of  slower  economic  growth  and  a  high  loan  rejection rate.  We  also  anticipate  property  prices  to  stay  flat  as  developers  will have  difficulty  passing  on  incremental  costs  in  an  environment  of weakening demand. Buyers/investors and developers are likely to adopt a  wait-and-see  stance  in  monitoring  market  conditions  in  1H15,  as the impact  of  goods  and  services  tax  (GST)  kicks in.  For the  stocks  under our  coverage,  we  estimate  new  sales  to  drop  by  an  average  10-20% YoY vs -25% YoY in 2014 and +41% YoY in 2013.

High  exposure  to  high-end  high-rise  projects.  Although  Eastern  & Oriental’s (E&O) Avira terraces Phase 1 is 80%-booked, conversion into sales has been slow – which we believe could be due to loan rejections from  the  banks.  Meanwhile,  we  think  it  would  be  challenging  for  the company  to  secure  property  sales  going  into  2015,  given  its  great exposure to the high-end, high-rise segment, which is typically sensitive to  changes  in  the  economic  climate.  Besides  The  Tamarind,  where condo  units  will  be  priced  at  <MYR1m  each,  almost  all  of  E&O’s products are priced above  MYR1m. Sales for The Tamarind – which is slated to be launched in 1Q15 – may not be easy as well, given that the project has high density, with about 1,000 units.

Next catalyst could be rather remote. The potential disposal of land at Seri Tanjung Pinang (STP2) is the only factor driving E&O’s share price, in our view. However, this may only come in 2Q15 as the awarding of the tender for reclamation works will only take place in Mar 2015, according to its management.    

Downgrade to NEUTRAL. Due to the challenging outlook for 2015, we downgrade  E&O  to  NEUTRAL.  Our  TP  drops  to  MYR2.27  (from MYR3.13), based on a larger 50% discount (from 35%) to RNAV

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Eastern & Oriental is a niche developer focusing on high-end property projects. Its key flagship project is Seri Tanjung Pinang 1, while its other landbanks are located in Kuala Lumpur and Iskandar, Johor. Eastern & Oriental is the key property play to capture the influx of liquidity. 

Recommendation Chart

Source: RHB