E&O’s 2QFY16 results came in below expectations. Headline net profit was lifted by an unrealised forex gain. We maintain our TRADING BUY rating and MYR1.80 TP (16% upside), as securing strategic equity partners for STP2 over the next six months could be a positive re-rating catalyst for the stock. We adjust our earnings forecasts downwards to account for the forex gain and delay in launches.

Below expectations. Eastern & Oriental’s (E&O) 2QFY16 (Mar) core earnings came in below our and market expectations. Headline net profit was lifted by some MYR30m unrealised forex gain. Meanwhile, interest cost continued to increase due to higher borrowings arising from overseas expansion after the acquisition of ESCA House, Landmark House & Thames Tower and Hammersmith. Net gearing during the quarter surged to 75%, but management expects this to fall to around 55% after the listing of UK assets in 1Q16. Meanwhile, a MYR1.084bn 7-year bank loan (at 5% interest rate) is in place to fund the reclamation of Seri Tanjung Pinang 2 (STP2).

MYR50m new sales in 2QFY16. New sales reached only MYR50m in 2Q vs MYR585m in 1Q, as there were not many new launches during the quarter. 1H property sales amounted to MYR635m, of which 73% was contributed by Tamarind Tower A and linked villas in Penang, while 16% was from The Mews in Kuala Lumpur. In the pipeline, management plans to roll out Avira terraces Phase 2 (GDV: MYR100m), Tamarind Tower B (GDV: MYR482m) and the remaining linked villas in Penang (MYR80m). We estimate that E&O may be able to close around MYR800m sales for FY16.

Forecasts. We cut our FY15 earnings forecast by 15% to account for the unrealised forex gain and slower progress billings for The Mews. We revise down our FY16-17 earnings estimates slightly by 6-7% to factor in some delay in project launches. Unbilled sales fell to MYR825m from MYR908m in 1QFY16.

Maintain TRADING BUY. We maintain our TRADING BUY rating and MYR1.80 TP, based on an unchanged 60% discount to RNAV. While earnings growth is sluggish, positive news flow on securing strategic equity partners for STP2 over the next six months could be the key re-rating catalyst as high land price may be set as a benchmark for subsequent transactions.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Eastern & Oriental Bhd (E&O) is a niche developer focusing on the high-end property development. Its key flagship project is Seri Tanjung Pinang 1. Other landbank are located in Kuala Lumpur and Iskandar, Johor. It is the key property play to capture the influx of liquidity.

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Source: RHB Research - 30 Nov 2015