Version 5 Bloomberg: EAST MK Reuters: ENOB.KL Refer to important disclosures at the end of this report Malaysia Equity Research 18 Nov 2016 FULLY VALUED Last Traded Price ( 17 Nov 2016): RM1.52 (KLCI : 1,626.77) Price Target 12-mth: RM1.20 (-21% downside) (Prev RM1.20) Shariah Compliant: Yes Where we differ: Lower earnings than consensus, contrarian call Analyst QUAH He Wei, CFA +603 2604 3966 hewei@alliancedbs.com What s New 2QFY17 results met our expectation but missed consensus Weak demand for high-end properties to impact sales; earnings outlook remains subdued Maintain FULLY VALUED and RM1.20 TP Price Relative Headwinds ahead Weak sentiment for high-end properties. Given its niche focus as a high-end property developer, E&O s property sales may suffer from the weak sentiment in this market segment due to affordability issues. We also noticed that its inventory has increased substantially from RM73m in FY14 to RM537m as at end-sep 16, indicating much slower demand for luxury properties. E&O s property sales are likely to remain uninspiring in the near to medium term given the subdued outlook for the luxurious property market in Malaysia. Seri Tanjung Pinang 2 will only be launched in CY19. E&O has already awarded the STP2A reclamation contract for a lump sum contract of RM1.078bn in Jan 16. The job involves 384 acres of reclamation (including 131 acres along the Gurney Drive foreshore for state government) though this has been delayed for a year. Meanwhile, it is looking to secure a strategic partner for the project which could help alleviate the financing burden for E&O, which is expected to cost RM1.8bn (inclusive of infra). Meanwhile, its gearing is expected to remain elevated as reclamation works progress to more advanced stages. Earnings visibility anchored by RM980m unbilled sales despite headwinds faced by E&O for its high-end products. We understand that management will be focusing on selling its unsold inventory in 2HFY17 to lift its property new sales which stood at a mere RM152m in 1HFY17. Forecasts and Valuation FY Mar (RM m) 2016A 2017F 2018F 2019F Revenue 421 476 558 524 EBITDA 105 139 161 157 Pre-tax Profit 54.4 53.5 55.6 25.4 Net Profit 36.8 40.6 44.9 20.2 Net Pft (Pre Ex.) 15.1 40.6 44.9 20.2 Net Pft Gth (Pre-ex) (%) (60.0) 169.9 10.5 (54.9) EPS (sen) 2.95 3.25 3.59 1.62 EPS Pre Ex. (sen) 1.21 3.25 3.59 1.62 EPS Gth Pre Ex (%) (60) 170 11 (55) Diluted EPS (sen) 3.13 5.47 5.86 3.60 Net DPS (sen) 2.00 0.98 1.08 0.49 BV Per Share (sen) 131 134 137 138 PE (X) 51.6 46.7 42.3 93.8 PE Pre Ex. (X) 126.1 46.7 42.3 93.8 P/Cash Flow (X) nm 8.5 nm 9.4 EV/EBITDA (X) 30.5 23.8 24.7 25.9 Net Div Yield (%) 1.3 0.6 0.7 0.3 P/Book Value (X) 1.2 1.1 1.1 1.1 Net Debt/Equity (X) 0.8 0.8 1.1 1.2 ROAE (%) 2.2 2.4 2.6 1.2 Earnings Rev (%): 0 0 0 Consensus EPS (sen): 5.20 6.70 5.10 Other Broker Recs: B: 2 S: 1 H: 5 Valuation: We maintain our TP of RM1.20, based on a 70% discount to our RNAV of RM3.90. The STP Phase 2A with 253 acres, which has a long gestation period, accounts for 47% of our RNAV. Key Risks to Our View: STP 2 reclamation requires heavy capital spending. At A Glance Issued Capital (m shrs) 1,257 Mkt. Cap (RMm/US$m) 1,911 / 439 Major Shareholders (%) Sime Darby Berhad (%) 22.2 GK Goh Holdings Ltd (%) 7.9 Morning Crest Sdn Bhd (%) 7.3 Free Float (%) 54.8 3m Avg. Daily Val (US$m) 0.18 ICB Industry : Real Estate / Real Estate Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Refer to important disclosures at the end of this report ed: CK / sa:bc
WHAT S NEW No catalyst in sight 2QFY17 results in line: Excluding exceptional items of RM0.7m losses, E&O reported a 2QFY17 core profit of RM4.5m. This takes 1HFY17 core earnings to 47% of our fullyear forecast, but only comprises 30% of consensus estimates. Lower property revenue recognition. E&O s 2QFY17 property revenue dipped 65% q-o-q and 12% y-o-y to RM48.6m, amounting to 61% of 2QFY17 revenue of RM79.3m (-51% q-o-q, -8% y-o-y). This is largely due to completion of the Andaman condominiums in Seri Tanjung Pinang 1 while The Tamarind is still in early stage of construction. This has also led to 62% q-o-q reduction in property EBIT to RM14.1m, implying 29% property EBIT margin. Meanwhile, hospitality segmental revenue rose 17% q-o-q and 1% y-o-y to RM30m. Its business turned around with RM2.6m EBIT in 2QFY17 from RM1.3m operating loss in 1QFY17. Slow sales in 2QFY17. E&O booked 2QFY17 property sales of RM37m (-68% q-o-q, -26% y-o-y), taking 1HFY17 sales to RM152m (-76% y-o-y). Therefore, unbilled sales (inclusive of minorities) dropped to RM980m (vs RM1.03bn in Jun 16). We understand that E&O will only launch Ariza Seafront Terraces in Seri Tanjung Pinang 1 worth RM85m GDV while focusing on clearing its record-high inventory of RM537m, largely attributable to its completed units in the Andaman condominiums. Meanwhile, the launch of its RM800m Conlay project (70:30 JV between E&O and Mitsui Fudosan) will now be deferred to FY18. Net gearing remains elevated. E&O s net gearing stood at 78% as at end-sep 16 as the listing plan of its UK arm, which was earlier expected to pare down its net gearing level to ~55%, has been shelved. We expect its gearing to increase further as it draws down its financing facility to fund the STP2A reclamation works. Quarterly / Interim Income Statement (RMm) FY Mar 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq Revenue 85.7 163 79.3 (7.5) (51.5) Cost of Goods Sold (81.2) (128) (65.7) (19.0) (48.8) Gross Profit 4.53 34.9 13.6 198.9 (61.1) Other Oper. (Exp)/Inc (5.0) (4.8) (4.7) (6.0) (2.9) Operating Profit (0.5) 30.0 8.86 nm (70.5) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 11.2 3.78 11.7 4.5 208.6 Net Interest (Exp)/Inc (14.5) (12.0) (13.3) 8.0 (11.1) Exceptional Gain/(Loss) 30.2 (11.2) (0.7) nm 93.7 Pre-tax Profit 26.4 10.6 6.49 (75.5) (39.0) Tax (2.1) (6.8) (2.6) 27.0 (61.3) Minority Interest 0.11 (0.6) 0.0 nm (97.7) Net Profit 24.5 3.24 3.83 (84.3) 18.4 Net profit bef Except. (5.8) 14.4 4.54 nm (68.5) EBITDA 15.7 38.6 25.2 60.6 (34.7) Margins (%) Gross Margins 5.3 21.3 17.1 Opg Profit Margins (0.5) 18.4 11.2 Net Profit Margins 28.5 2.0 4.8 Source of all data: Company, AllianceDBS Page 2
CRITICAL DATA POINTS TO WATCH Earnings Drivers: Headwinds ahead. Given the weak sentiment in the property market, E&O could face a hard time selling its high-end properties which have always been its focus. This is evident in its high inventory level of completed properties which rose to c.rm537m as at Sep 16 from RM73m in Mar 14. We believe that the high-end segment, especially those with ASP in excess of RM1m/unit will face much slower sales going forward due to concerns of affordability and potential supply glut. Property sales (RMm) Revenue (RMm) Shift to more affordably priced properties. E&O secured RM1.1bn property sales in FY16, mainly underpinned by the overwhelming response for The Tamarind executive apartment project, worth RM900m in GDV terms, which has been marketed as affordable apartments in the luxurious STP. Nevertheless, the project will only be completed by 2019, lowering its earnings impact in the near term. Unbilled sales of RM980m. This is mainly due to its Klang Valley and Penang projects which will likely provide earnings visibility for the next two years. However, earnings growth may be subdued as some of its key projects including The Mews@KLCC and Avira@Medini are only recognised under its JVs. Upcoming launches such as Avira Garden Terraces phase 2 may not fare well given the poor sentiment within Iskandar Malaysia. Long-awaited STP 2 reclamation contract. After a delay of one year, E&O has secured its STP 2A reclamation contractor involving 384 acres of reclamation (including 131 acres along Gurney Drive foreshore for state government). Also, E&O is expected to rope in a long-term strategic partner for its STP 2A s 253 acres project in the near term, given the high capital requirement for the massive reclamation works. While the STP 2A s land bank is set to be its jewel in the crown, it may take a few years before the first launch is rolled out. EBIT (RMm) EBIT margin (%) UK arm is a long-term development. The listing of its UK property arm on AIM of the London Stock Exchange has been aborted due to unfavourable market conditions. While its UK venture is long-term positive for E&O to diversify beyond Malaysia, the high London property prices could result in lacklustre sales. Page 3
Balance Sheet: Net gearing stood at 78% as at end-sep 16 due to its UK land bank acquisition. Cash flow management is critical given its huge capex requirement for STP2A reclamation which is underway. Share Price Drivers: Stronger-than-expected sales. E&O needs a strong launch pipeline in order to sustain its sales momentum which is facing challenges given the weak sentiment among property buyers. It may have to allocate more resources to focus on relatively affordable properties which are still well-received in the Malaysian market. Leverage & Asset Turnover (x) Capital Expenditure Key Risks: Weak sentiment. The poor sentiment among property buyers could lead to sluggish group sales. Heavy capex. STP 2 reclamation requires heavy capital spending given the huge area involved. A strategic partner for STP2A project will help ease the funding pressure significantly. Company Background E&O is a niche high-end residential developer with land banks in Penang (among largest landowners on the island), KL (near KLCC, Damansara Heights, Kemensah Heights), Iskandar Malaysia (Medini) and London (small exposure). ROE (%) Forward PE Band (x) PB Band (x) Page 4
Key Assumptions Property sales (RMm) 667 1,101 528 594 406 Revenue (RMm) 450 421 476 558 524 EBIT (RMm) 110 42.3 93.5 101 95.6 EBIT margin (%) 24.6 10.0 19.6 18.1 18.2 Segmental Breakdown Revenues (RMm) Property development 338 302 352 427 387 Construction 0.0 0.0 0.0 0.0 0.0 Hotel operations 107 115 121 127 133 Property investment & others 4.25 3.45 3.63 3.81 4.00 Total 450 421 476 558 524 EBIT (RMm) Property development 157 90.6 102 109 99.4 Construction 0.0 0.0 0.0 0.0 0.0 Hotel operations 1.55 3.01 3.63 3.81 4.00 Property investment & others 103 (29.6) 0.18 0.19 0.20 Others (152) (21.8) (12.0) (12.0) (8.0) Total 110 42.3 93.5 101 95.6 EBIT Margins (%) Property development 46.5 30.0 28.9 25.5 25.7 Construction N/A N/A N/A N/A N/A Hotel operations 1.4 2.6 3.0 3.0 3.0 Property investment & others 2,435.1 (856.9) 5.0 5.0 5.0 Total 24.6 10.0 19.6 18.1 18.2 Income Statement (RMm) Revenue 450 421 476 558 524 Cost of Goods Sold (318) (359) (363) (420) (376) Gross Profit 131 62.6 114 138 148 Other Opng (Exp)/Inc (20.8) (20.3) (20.1) (36.9) (52.7) Operating Profit 110 42.3 93.5 101 95.6 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 12.8 42.8 25.3 23.7 9.15 Net Interest (Exp)/Inc (35.5) (52.5) (65.3) (68.9) (79.4) Exceptional Gain/(Loss) 115 21.8 0.0 0.0 0.0 Pre-tax Profit 202 54.4 53.5 55.6 25.4 Tax (45.5) (15.9) (7.3) (8.3) (4.1) Minority Interest (4.6) (1.6) (5.5) (2.4) (1.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 152 36.8 40.6 44.9 20.2 Net Profit before Except. 37.6 15.1 40.6 44.9 20.2 EBITDA 144 105 139 161 157 Growth Revenue Gth (%) (9.6) (6.3) 13.1 17.2 (6.0) EBITDA Gth (%) (22.5) (26.8) 31.7 16.2 (2.4) Opg Profit Gth (%) (26.9) (61.7) 121.1 7.8 (5.1) Net Profit Gth (Pre-ex) (%) (48.1) (60.0) 169.9 10.5 (54.9) Margins & Ratio Gross Margins (%) 29.2 14.9 23.8 24.7 28.3 Opg Profit Margin (%) 24.6 10.0 19.6 18.1 18.2 Net Profit Margin (%) 33.9 8.7 8.5 8.0 3.9 ROAE (%) 9.5 2.2 2.4 2.6 1.2 ROA (%) 5.0 1.0 1.0 1.0 0.4 ROCE (%) 3.0 0.8 2.0 2.0 1.7 Div Payout Ratio (%) 30.3 67.9 30.0 30.0 30.0 Net Interest Cover (x) 3.1 0.8 1.4 1.5 1.2 Minimal contribution from hotel operations Underpinned by Avira Garden Terraces and The Mews Page 5
Quarterly / Interim Income Statement (RMm) FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Revenue 85.7 118 149 163 79.3 Cost of Goods Sold (81.2) (95.1) (117) (128) (65.7) Gross Profit 4.53 22.5 32.2 34.9 13.6 Other Oper. (Exp)/Inc (5.0) (5.2) (4.9) (4.8) (4.7) Operating Profit (0.5) 17.3 27.2 30.0 8.86 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 11.2 3.24 3.56 3.78 11.7 Net Interest (Exp)/Inc (14.5) (12.5) (12.1) (12.0) (13.3) Exceptional Gain/(Loss) 30.2 (4.3) (19.1) (11.2) (0.7) Pre-tax Profit 26.4 3.79 (0.5) 10.6 6.49 Tax (2.1) 0.60 (13.2) (6.8) (2.6) Minority Interest 0.11 (0.5) (1.2) (0.6) 0.0 Net Profit 24.5 3.88 (14.8) 3.24 3.83 Net profit bef Except. (5.8) 8.20 4.30 14.4 4.54 EBITDA 15.7 25.8 35.7 38.6 25.2 Underpinned by unbilled sales Growth Revenue Gth (%) 24.4 37.2 26.7 9.6 (51.5) EBITDA Gth (%) (44.4) 64.2 38.5 8.2 (34.7) Opg Profit Gth (%) 74.9 nm 57.2 10.3 (70.5) Net Profit Gth (Pre-ex) (%) nm nm (47.5) 234.9 (68.5) Margins Gross Margins (%) 5.3 19.2 21.6 21.3 17.1 Opg Profit Margins (%) (0.5) 14.7 18.3 18.4 11.2 Net Profit Margins (%) 28.5 3.3 (9.9) 2.0 4.8 Balance Sheet (RMm) Net Fixed Assets 351 335 615 878 1,125 Invts in Associates & JVs 107 115 140 164 173 Other LT Assets 889 1,606 1,606 1,606 1,606 Cash & ST Invts 200 248 462 94.2 291 Inventory 208 213 168 195 174 Debtors 201 76.1 119 140 131 Other Current Assets 1,111 1,166 1,030 1,433 1,312 Total Assets 3,066 3,759 4,140 4,508 4,813 ST Debt 453 203 203 203 203 Creditor 137 136 180 211 199 Other Current Liab 37.1 16.3 16.3 16.3 16.3 LT Debt 710 1,315 1,615 1,915 2,215 Other LT Liabilities 82.8 400 400 400 400 Shareholder s Equity 1,600 1,639 1,671 1,706 1,721 Minority Interests 47.1 48.8 54.3 56.6 57.7 Total Cap. & Liab. 3,066 3,759 4,140 4,508 4,813 Non-Cash Wkg. Capital 1,347 1,303 1,121 1,539 1,402 Net Cash/(Debt) (963) (1,270) (1,356) (2,024) (2,127) Debtors Turn (avg days) 163.3 66.0 91.3 91.3 91.3 Creditors Turn (avg days) 148.0 147.0 168.5 186.5 231.5 Inventory Turn (avg days) 181.1 227.1 202.9 172.8 208.4 Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 2.7 4.8 4.5 4.3 4.6 Quick Ratio (x) 0.6 0.9 1.5 0.5 1.0 Net Debt/Equity (X) 0.6 0.8 0.8 1.1 1.2 Net Debt/Equity ex MI (X) 0.6 0.8 0.8 1.2 1.2 Capex to Debt (%) 1.0 0.5 16.5 14.2 12.4 Z-Score (X) 1.8 1.4 1.3 1.2 1.1 Expect gearing to increase due to STP phase 2A reclamation works Page 6
Cash Flow Statement (RMm) Pre-Tax Profit 202 54.4 53.5 55.6 25.4 Dep. & Amort. 20.8 20.3 20.1 36.9 52.7 Tax Paid (49.9) (39.9) (7.3) (8.3) (4.1) Assoc. & JV Inc/(loss) (12.8) (42.8) (25.3) (23.7) (9.2) Chg in Wkg.Cap. (662) (165) 182 (418) 137 Other Operating CF (87.5) (26.5) 0.0 0.0 0.0 Net Operating CF (589) (199) 223 (358) 202 Capital Exp.(net) (11.5) (7.2) (300) (300) (300) Other Invts.(net) 22.2 (87.7) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 31.2 0.0 0.0 0.0 Div from Assoc & JV 98.1 0.0 0.0 0.0 0.0 Other Investing CF 1.21 2.11 0.0 0.0 0.0 Net Investing CF 110 (61.6) (300) (300) (300) Div Paid (33.4) 0.0 (9.0) (10.0) (4.5) Chg in Gross Debt 436 311 300 300 300 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (0.9) (0.8) 0.0 0.0 0.0 Net Financing CF 401 310 291 290 296 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (77.4) 48.9 214 (368) 197 Opg CFPS (sen) 5.86 (2.8) 3.28 4.84 5.19 Free CFPS (sen) (48.0) (16.5) (6.2) (52.7) (7.9) Target Price & Ratings History Source: AllianceDBS Analyst: QUAH He Wei, CFA Page 7
DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 8
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Additional information is, subject to the overriding issue of confidentiality, available upon request to enable an investor to make their own independent evaluation of the information contained herein. Wong Ming Tek, Executive Director Published by AllianceDBS Research Sdn Bhd (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur, Malaysia. Tel.: +603 2604 3333 Fax: +603 2604 3921 email : general@alliancedbs.com Page 9