• Downgrade to NEUTRAL from Buy, TP drops to MYR0.33 from MYR0.50, 5% upside. Eastern & Oriental’s 4QFY23 (Mar) results missed expectations, mainly due to the write-down on its property development cost. Although operating earnings picked up since two quarters ago, we are cautious on the upcoming completion of The Conlay project (GDV: MYR968m) in Mar 2024, as its take-up rate remains low, at around 30%. Our lower TP reflects the potential risk of further impairments in FY24.

• 4QFY23 results review. The sequential drop in E&O’s revenue was due to higher revenue recognition from the reclaimed land sale to KWEST in the previous quarter. Earnings were skewed by a few exceptional items: i) MYR135.3m property development cost write-down on the UK property assets, which we treat as a core operating item; ii) MYR112.4m FV adjustment of investment properties, ie Straits Quay and St Mary Place; iii) MYR3.2m reversal of loss on right-of-use assets; and iv) MYR7.6m unrealised FX gain. Net gearing fell to 0.45x from 0.62x in 3QFY23, mainly on the larger equity position post completion of the rights issue of irredeemable convertible unsecured loan stocks or ICULS.

• The Meg – the key sales driver. E&O’s new sales hit MYR121.1m vs MYR166m in 3QFY23, bringing full-year sales to MYR677m. The Meg was the largest contributor, with MYR468.9m sales booked for the year. The Peak contributed MYR153m in sales, followed by The Conlay (MYR26.6m) and Avira Phases C and D (c.MYR28.5m). The Meg is now fully sold, and the company has already rolled out the next block – Arica – which we understand is now about 50%-sold (inclusive of bookings) at an ASP of around MYR1,000 psf. Going into FY24, E&O plans to launch only two projects in Andaman Island with a combined GDV of about MYR800m.

• The Conlay sales remained slow. The Conlay (a 51%-owned project) is slated for completion in Mar 2024. However, we are concerned over the potential risk of impairment and its addition to E&O’s unsold inventory upon its completion, since its take-up rate is only at 32-33%.

• Forecasts. We slash FY24-25F earnings by 16-24%. Billings from The Meg and Arica should be slow during the initial stage of construction. Unbilled sales stood at MYR878.9m (3QFY23: MYR823.6m).

• Valuation. Our new, lower TP is based on a 85% discount to RNAV (from 75%), with a 2% ESG discount inked in – given our higher ESG score of 2.90 for the company. E&O was recently awarded the Platinum Provisional Green Real Estate Certifications for its projects in Andaman Island.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023