• Upgrade to BUY from Neutral, new TP of MYR0.59 from MYR0.50, 23% upside. Eastern & Oriental’s 1QFY23 (Mar) results beat estimates. Sales contributions from The Meg and successful cost-cutting measures in the past boosted its earnings. 1QFY23 property sales already hit MYR207.1m, and the company should be able to achieve MYR500m in property sales by end-FY23. Our ratings upgrade is premised on the notion that E&O is now a turnaround play, and its volatile earnings trend is now history.

• 1QFY23 results review. The strong revenue growth was mainly driven by sales contributions from The Meg, higher revenue recognition on Seri Tanjung Pinang 2A (STP2A) reclamation works, as well as a stronger performance from the hospitality division. The current percentage of completion for the reclamation works is now at 69.5%, vs 66.3% in Mar 2023. Meanwhile, the average room rate for Eastern & Oriental Hotel in Penang is now at MYR646, vs MYR532 last year. The hotel’s average occupancy rate is at 78.8%, ie a significant surge from last year. However, headline net profit was skewed by a MYR22.8m unrealised FX loss. Stripping it off, core net profit would have been around MYR20m. Management guided that apart from the swing in the GBP/MYR rate (and hence the unrealised FX gain/loss), the company will not likely book any further impairments/write-offs going forward. Its current net gearing is relatively unchanged, at 0.59x.

• Sales momentum on the level. E&O’s new sales reached MYR207.1m (4QFY22: MYR226.1m). The Meg contributed MYR191.9m, followed by The Peak (MYR7.5m), The Conlay (MYR5m) and Avira Phase C (c.MYR2.7m). The Meg is now c.75% sold (63.6% as at June) while the take-up rate for The Conlay is still at c.32%, ie unchanged from 4QFY22.

• Healthy flow of planned launches next year. While the remaining units of The Meg, The Conlay and The Peak will drive sales in the coming quarters, management has lined up two more new projects at STP2A to be rolled out next year. These include Plot 16C (indicative GDV: MYR348m) during the Lunar New Year period, as well as 51 units of terraces and 18 units of semi-detached units in Sep 2023 (total GDV: MYR240m). We understand that the terrace and semi-detached homes will be priced around MYR3m and >MYR4m per unit.

• Forecasts. In view of the improvement in core earnings, we raise our FY23- 25 earnings forecast significantly. Given encouraging sales, unbilled sales increased to MYR597.2m vs MYR455m as at 4QFY22.

• ESG. We believe the turnaround in earnings should help to boost investors’ confidence. Our higher TP is based on a 70% discount to RNAV (from 75%), with a 6% ESG discount inked in.

Source: RHB Research - 25 Aug 2022