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Eastern & Oriental Bhd (Aug 26, RM1.68)
Maintain neutral with an unchanged target price (TP) of RM1.60: Eastern & Oriental Bhd (E&O) first quarter ended June 30, 2016 (1QFY17) core net income of RM14.5 million was deemed within expectations despite making up only 16% of our and the consensus estimates as its 2QFY17 and 3QFY17 earnings should be lifted by profit recognition of its Princes House project in the UK. Note that we excluded a foreign-exchange loss of RM14 million in our core net income calculation.
E&O recorded a top-line growth of 137% year-on-year (y-o-y) in 1QFY17, mainly driven by higher revenue recognition of its ongoing projects in Seri Tanjung Pinang (STP), namely The Tamarind, the Amaris Terraces, the Andorra Terracces and the Andaman Condominium. Similarly, core net profit for 1QFY17 increased by 63% y-o-y due to similar reasons. Unbilled sales stood at RM1.03 billion, providing more than three years of earnings visibility.
E&O recorded new sales of RM115 million in 1QFY17, declining from RM429 million in 4QFY16, due to absence of major property launches in 1QFY17. The bulk of new sales (about 89%) in 1QFY17 was contributed by The Tamarind project in Penang.
Meanwhile, projects that will be launched in FY17 include Conlay Place (gross development value: RM800 million) and remaining phases of The Tamarind (RM160 million.)
E&O remained highly geared in 1QFY17, whereby its net gearing stood at 0.78 times against a net gearing of 0.76 times as at end-FY16. While the listing of its UK subsidiary is off the table, E&O is pinning its hopes on securement of a strategic investor for its STP2 projects in Penang to pare down borrowings, though a timeline has yet to be provided for the securement.
We maintain “neutral” with an unchanged TP of RM1.60, based on a 65% discount to revalued net asset value. We maintain our earnings forecasts for FY17 and FY18.
Earnings in the coming quarters of FY17 should improve due to high unbilled sales of RM1.03 billion and profit recognition of its UK project. However, we see limited catalysts for E&O at the moment due to the challenging outlook for the property market. Potential news flows on the securement of a level-one strategic investor for STP2 remain the key catalyst for E&O. — MIDF Research, Aug 26
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This article first appeared in The Edge Financial Daily, on Aug 29, 2016. Subscribe to The Edge Financial Daily here.
