This article first appeared in The Edge Malaysia Weekly on February 27, 2023 - March 5, 2023

LUXURY lifestyle developer Eastern & Oriental Bhd (E&O), which returned to profitability for the nine months ended Dec 31, 2022 (9MFY2023), expects net profit growth to be flat for the full year ending March 31, 2023 (FY2023). That is due, in part, to the impact of foreign currency fluctuations.

Executive chairman Datuk Tee Eng Ho says earnings for FY2023 should at least match the last financial year, amid currency swings. The group reported a net profit of RM63.76 million for FY2022, following two years of losses after the Covid-19 pandemic brought property launches almost to a standstill.

“However, excluding the impact of foreign currency translation, net profit [in FY2023] should be better than in FY2022,” he tells The Edge. At end-January, Tee and his family indirectly owned 49.1% of E&O through their private vehicles Amazing Parade Sdn Bhd (39.22%), Paramount Spring Sdn Bhd (8.85%) and Kerjaya Prospek Development (M) Sdn Bhd (1.03%).

A Bloomberg poll of analysts forecast a lower net profit of RM52.65 million for the group in FY2023.

Tee says the property sales target for the year will be roughly flat, at RM500 million to RM600 million.

“We remain cautious on the overall property market, amid further government policy changes, fluctuations in exchange rates versus the British pound, and rising interest rates,” he says.

He adds that international interest in Malaysian property is not back at the levels previously enjoyed, affected partly by the stricter rules set for the Malaysia My Second Home (MM2H) programme, which was reactivated in 2021 after being suspended in 2020. “The location of properties in places such as Penang and Kuala Lumpur and the product offerings will be important. [On our part, we give] what the people need.”

E&O achieved property sales of RM555.9 million in 9MFY2023, contributed largely by the sales of its maiden serviced apartment project called The Meg at Phase 1 of Andaman Island, previously known as Seri Tanjung Pinang 2A (STP2A), in Penang, and The Peak luxury condominium in Damansara Heights, Kuala Lumpur. The reclamation of Phase 1 of Andaman Island (253 acres) is already 76.2% completed.

E&O is targeting about RM700 million worth of launches this year, the bulk of which (RM600 million) will be in Phase 1 of Andaman Island, with RM82 million in Johor.

Tee is confident the group’s new projects in Andaman Island will continue to sell well, owing to the strong E&O branding, unique and premium products, an “island on an island” concept, and its proximity to Gurney Drive.

Tee points out that, unlike other reclamation projects such as Forest City in Johor, which target foreign buyers, buyers of its Penang properties are mainly locals.

Meanwhile, the group’s unbilled sales rose to RM823.6 million as at 9MFY2023, and it is confident of hitting RM1 billion by end-FY2023.

Last Wednesday, E&O reported RM28.45 million in net profit for 9MFY2023, compared to a net loss of RM15.26 million a year earlier. The results were dampened by a higher foreign exchange (forex) loss of RM26.7 million, versus RM9.4 million in the same period a year earlier.

Excluding the unrealised forex loss and other one-off items, its net recurring profit for 9MFY2023 came in at RM55.17 million, compared to a net recurring loss of RM5.87 million for 9MFY2022.

E&O is exposed to fluctuations in the value of the pound, owing to its real estate assets in London, including the 54-unit Lincoln Suites; Princes House, in Kingsway near Covent Garden; ESCA House in Bayswater; and a vacant parcel of commercial property in Hammersmith.

The group’s revenue for 9MFY2023 was RM252.77 million, up 202% year on year (y-o-y), mainly because of billings from the land reclamation in Andaman Island Phase 1 and higher sales in The Meg project, which saw a 95% take-up rate.

Its hospitality segment also recorded higher revenue in 9MFY2023, owing mainly to higher occupancy rates at Eastern & Oriental Hotel of 83.9%, up 29.7% y-o-y, on the back of an average room rate of RM691.

At end-December 2022, E&O had a cash balance of RM186.31 million and total debt of RM1.29 billion. Net debt was RM1.1 billion versus equity of RM1.79 billion, translating into a net gearing ratio of 0.62 times. This was up from 0.60 times at end-March 2022.

Tee maintains that E&O’s balance sheet remains strong, with its cash balance slated to climb to RM500 million by end-FY2023 because the proposed rights issue of irredeemable convertible unsecured loan stocks (ICULS), which is expected to be completed in early March, will add between RM178.22 million and RM255.76 million to the group’s coffers. This is in addition to revenue recognition from sales at The Meg project, which it expects to be fully sold by end-March.

“Of course, a large portion of the money will be used as capital expenditure for the development of Andaman Island Phase 1 and the reclamation of Andaman Island Phase 2 (formerly known as STP2B and STP2C),” he says, adding that the group will try to keep its gearing ratio below one.

E&O managing director Kok Tuck Cheong says the next three to four years are set to be an “exciting period” for the group, with the completion of the reclamation of Andaman Island Phase 2.

“The reclamation of the balance 507 acres on Andaman Island will complete the concession rights to reclaim a total of 1,000 acres in Penang that was awarded to us by the state government,” he told a media and analyst briefing last Wednesday.

The net saleable portion of the total 760 acres to be reclaimed in Andaman Island works out to about 20 million sq ft, Kok says. Assuming the land is worth about RM500 psf, going by the transacted prices of about RM530 psf in Andaman Island Phase 1 in its sale to Kumpulan Wang Persaraan (Diperbadankan) in 2017, E&O stands to receive land worth at least RM10 billion.

“In addition, we have secured freehold titles for Andaman Island Phase 1. Similarly, that will also go on to Phase 2, which is partly why The Meg and all the properties that have been launched, including STP1 and STP2, have achieved astounding success,” says Kok.

On its London properties, he says: “London is a very challenging market — more difficult than Malaysia — because [of the impact] of the Ukraine conflict [and the subsequent sanctions placed on Russian nationals by the UK].

“We have put a pause button on London at the moment, despite the fact that our Lincoln Suites apartment-hotel is doing exceedingly well. Opened in September 2021, it is now enjoying an occupancy rate of 92%.”

According to Bloomberg data, three of the four analysts covering E&O’s stock have a “neutral” or “hold” rating on it, while one has a “buy” call, with target prices averaging at 50 sen a share.

PublicInvest Research analyst Tan Siang Hing says the trading environment is likely to be challenging, especially for the high-end segment, given economic headwinds and rising mortgage rates, limiting any significant re-rating catalysts for the group.

“Capital commitment is also expected to be high, owing to ongoing land reclamation works in Andaman Island,” Tan says in a Feb 23 report.

Shares in E&O have lost 10.29% from 34 sen apiece on Feb 17 — the ex-date for its rights issue of three ICULS for every four existing shares held — to close at 30 sen last Wednesday (Feb 22). They are down 41.35% over the past year. At last Wednesday’s closing price of 30 sen, its market capitalisation stood at RM442.9 million.

The issue price for the ICULS (which offers an annual coupon rate of 3.8% and has a five-year tenure) is fixed at 23.5 sen, which is a discount of 10 sen, or 29.85%, to the theoretical ex-rights price of E&O shares of 33.5 sen as at Jan 10, 2023 — being the last market day immediately before the price-fixing date.

Interestingly, based on the last traded price for the rights entitlement to subscribe for the ICULS of 3.5 sen each last Wednesday, there is an opportunity for investors to buy the rights (at 3.5 sen), subscribe for the ICULS at 23.5 sen and convert the ICULS subsequently to E&O shares at an effective cost of 27 sen each, which is lower than last Wednesday’s closing price of 30 sen per E&O share. Trading of the rights entitlement will cease on Feb 28.

Tee says he is not too concerned about the share price drop. “For management, our duty is how we perform. Not the share price.”

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