E & O ... Dec10

KENANGA RESEARCH:
Disappointing 2Q11
-  1H11 net profit of RM15.3m was below expectations, accounting for 28% of street’s FY11E net profit of RM54.6m and 27% of our RM57.6m. Eastern & Oriental (EOB) recorded 6M11 sales of c.RM200m sales; 70% is from Quayside Resort and 30% from St Mary. Take-up rates remain unchanged on QoQ basis
for Quayside Resort Tower 1 and St Mary. Quayside Tower 2 reported improved take ups to 45% from last quarter’s 20%.

- YoY, 1H11 net profit slid 6% YoY. Revenue fell 41% YoY to RM112.1m given less billings from subsidiary projects. But negative impact was softened by 1H11 EBITDA margins enhancing 10.5ppt to 33.8% due to sale of landbank (Batai land) and completion of The Suite@Straits Quay. Contributions from jointly controlled entities (St Mary) also improved with more significant billings. These helped softened erosions from pre-opening expenses (RM4.1m) for Lone Pine Hotel/Straits Quay Retail and increased finance cost from the 8% coupon p.a. ICSLS (RM4.3m).

- QoQ, 2Q11 pretax profit dipped 71% to RM5.2m due to 1Q11 high base effect. Although 2Q11 revenue grew 42% QoQ to RM65.8m due to completion of The Suite@Strait Quay, there were richer margins observed in 1Q11. 1Q11 saw sale of completed properties (Acacia, Villas by the Sea) which means higher margins. As a result, we see margins compressed sharply by 37.8ppt QoQ to 18.2%.

- Lowering FY11-12E net profit by 30%-11% to RM40.3m-RM65.8m. We are factoring for the mentioned pre-opening expenses, as well as, slowing our sales and recognition assumptions for Quayside Resort and St Mary. For 2H11, we can look forward to recognition of Ariza terraces which are at tail end. Upcoming
launches are The Peak @ Jln Teruntung (open for registration soon) and Jln Yap Kwan Seng (mid CY11; currently pursuing conversion to commercial title due to need for plot ratio). Unbilled sales of RM604.8m provide 2-3 years visibility.

-  Fair value slightly lowered to RM1.24 (from RM1.26) based on 0.9x peer PBV on lowered FY11E BV/share of RM1.38 (previously RM1.40). FY11-12E PER of 22-14x is above peer averages of 12-13x, whilst their 0.8x PBV leaves little upside to 0.9x peer PBV. But we maintain Trading BUY since EOB should
enjoy positive news flow over the next 6 months with news on reclamation of Seri Tanjung Pinang 2 (740ac). The group has just submitted its layout plans and approval period is 3-6 months. Its balance sheet is healthy (net gearing 0.4x; cash balance of RM491m of which most are uncommitted) and commencement of the 740 ac res reclamation, which would substantially re-rate the company.