E&O’s 1QFY16 (Mar) results were below expectations, while headline earnings were lifted by a land disposal gain. Maintain NEUTRAL, with a lower TP of MYR1.61 (from MYR2.02, 7% upside), given the macro headwinds and political risk, which should neutralise the upcoming positive news flow on the award of the tender for reclamation works at STP 2. We cut our core earnings forecast to reflect the one-off item.

Below expectations. Eastern & Oriental’s (E&O) 1QFY16 core earningscame in below our and market expectations. Its headline net profit was lifted by a MYR20.7m (MYR15.5m net) gain from the disposal of land in Sungei Besi which amounted to MYR96m, under a 50%-owned subsidiary. 68% of earnings during the quarter were, therefore,contributed by this one-off gain, while property projects such as Avira Garden in Iskandar, The Mews in Kuala Lumpur and the ongoing Quayside projects in Penang underpinned the bulk of its remaining earnings.

MYR585m new sales in 1QFY16. New sales hit MYR585m (vs MYR468m in 4QFY15), of which MYR450m was contributed by Tamarind Tower A, and the rest from Avira Garden terraces. It is encouraging that 90% of the bookings in Tamarind have successfully become contract sales. In the pipeline, considering the challenging market conditions, management plans to launch Tamarind Block B and Avira terraces Phase 2 by December and hopes the market would start to recover.

Forecasts. We cut our FY15 core net profit forecast to reflect the one-off gain. Unbilled sales inched up to MYR908m from MYR868m in 4QFY15.

Maintain NEUTRAL. As market sentiment has deteriorated severely following the sell-down in the equity market, the weakening currency and political instability, we lower our TP to MYR1.61 (from MYR2.02), based on a larger discount to RNAV of 60% (from 50%). The impact of theupcoming positive news flow on Seri Tanjung Pinang 2 (STP2)reclamation may, therefore, be neutralised. Note that E&O’s trough valuations were at a massive 91% discount to RNAV during the subprime crisis in 2009. Maintain NEUTRAL.