• Upgrade to NEUTRAL from Sell, with new TP of MYR0.50 from MYR0.48, 4% downside. 4QFY22 (Mar) results missed expectations. The soft launch of The Meg boosted property sales in 4QFY22, with Eastern & Oriental managing to rake in MYR271m sales for FY22. Management aims to achieve MYR500m in property sales in FY23 in view of the pipeline launches. Given the successful re-negotiation of borrowing cost as well as various cost optimisation efforts, E&O is likely to turn profitable in FY23.

• 4QFY22 results. Revenue was lower YoY due to the lack of new projects during the quarter, while sales from The Meg have yet to flow in significantly. Headline net profit was skewed by a few exceptional items, including an MYR80.8m gain from fair value adjustment of investment properties (mainly in the UK), MYR35.1m reversal of impairment loss on the right-of-use assets (related to E&O Residence), as well as MYR23.2m unrealised FX gain. Stripping off these one-off items, E&O incurred a core net loss of around MYR22m in 4QFY22 and MYR28m for the full year. Current net gearing stands at 0.6x.

• Stronger sales in 4QFY22. New sales achieved MYR226.1m vs MYR24.6m in 3QFY22. Full-year sales reached MYR271.3m compared with MYR311.7m in FY21. Penang contributed 82% of total sales, mainly driven by The Meg at Seri Tanjung Pinang 2A, Klang Valley (9%) and Johor (9%). The Meg, which is undergoing a soft launch, has been well-received. The project is now 34% sold and 60% booked. The take-up rate for The Conlay has picked up slightly to 32% (from 31% in last quarter).

• Expect MYR500m property sales in FY23F. Given the pipeline projects, including The Peak, management expects to hit MYR500m in property sales for FY23F. E&O is currently previewing The Peak, and we understand that interest from affluent potential buyers has been strong.

• Forecasts. Historical earnings for E&O have been volatile. As management has endeavoured to reduce its borrowing cost, coupled with other cost management efforts over the last six months, we expect the company to turn profitable in FY23. Management guided that the company managed to renegotiate its borrowing cost lower prior to the recent interest rate hike. Meanwhile, unbilled sales rose to MYR455m vs MYR277.6m as at 3QFY22. Outstanding billings from the KWAP land sale stood at MYR163m.

• ESG. We have an ESG score of 2.70 for E&O. As we factor in the latest financial numbers, our higher TP is based on an unchanged 75% discount to RNAV and 6% ESG discount.

Source: RHB Research - 26 May 2022