• Eastern & Oriental (E&O) incurred a core net loss of RM4.8m in 2QFY21 due to weaker revenue and losses for its hospitality business. This reduced core net profit to RM1.2m in 1HFY21, down 79% yoy.
• Unrealised forex gain of RM4.1m from the strengthening of £ against RM offset net exceptional loss of RM4.2m in 1HFY21.
• Although earnings in 1HFY21 are lagging our full-year forecast, we expect land sale gains to lift earnings in 2HFY21. We reiterate our long-term BUY call with TP of RM0.54, based on an 80% discount to RNAV.

Below expectations

E&O’s reported core net profit of RM1.1m in 1HFY21 is lagging consensus full-year forecast of RM23.7m and our estimate of RM11.3m. But we expect higher property development revenue from the sale of inventories and The Conlay luxury condominium to lift earnings in 2HFY21. Deemed partial land disposal of The Peak land to a proposed joint venture with Mitsui Fudosan will also lift its bottom line in 2HFY21. We raise our net profit forecast by 21% to RM51m to reflect the reversal of unrealised forex loss on UK receivables in 1QFY21 to a gain in 2QFY21 as £ strengthened against RM. Our core EPS forecasts are largely unchanged.

Slow property sales and weak hospitality earnings

E&O achieved RM148m sales in 1HFY21, lower compared to RM181.9m in 1HFY20. Property development sales were slow due to weak market sentiment and lower foreign demand for its luxury products due to the Covid-19 pandemic and travelling restrictions. But the disposal of Liew Weng Chee land totalling RM55m shored up its sales in 1HFY21. Unbilled sales of RM126.1m will be progressively recognised over FY21-24. The Conlay saw take-up rate of 27% as at 19 November 2020. Revenue fell 52% yoy to RM129m in 1HFY21 with lower property development revenue (-50% yoy) on reduced land sales and a plunge in hospitality revenue (-71% yoy).

A potential recovery play

E&O’s operations were severely impacted by the Covid-19 pandemic and travel restrictions as its luxury homes and hotel saw slower take up and occupancy (average of 20% in 1HFY21) respectively. The development of vaccines and potential lifting of travel restrictions will support an earnings recovery. The stock is trading at attractive 85% discount to RNAV of RM2.68. Long-term BUY with TP of RM0.54, based on 80% discount to RNAV. Key downside risk is prolonged weakness in demand for luxury homes due to the pandemic and travel restrictions.

Source: Affin Hwang Research - 1 Dec 2020