E&O crosses major hurdle

Actual photograph of Seri Tanjung Pinang Phase One including Straits Quay with illustration of Quayside Condominiums superimposed on it.

PETALING JAYA: After three years, Eastern & Oriental Bhd (E&O) has crossed a major hurdle by obtaining the conditional approval from the Department of Environment (DOE) to develop phase two of its Seri Tanjung Pinang (STP) project involving the reclamation of 891 acres (361ha) of sea-fronting land in Penang.

The company disclosed to Bursa Malaysia the progress of STP, prompting analysts to rerate the stock. The stock was up 21 sen to RM2.46 on a volume of 27.99 million shares yesterday.

Interestingly, the closing price yesterday surpassed the RM2.30 per share thatSime Darby Bhd had paid in 2011 for its purchase of a stake amounting to almost 31%. The transaction sparked controversy because some minorities claimed that Sime Darby should have been forced to undertake a mandatory general offer for E&O. The authorities, however, ruled against it.

Analysts expect a significant positive impact, as the estimated gross development value (GDV) of STP2 is about RM25bil, six times the GDV of the first phase of STP, which stood at about RM4bil.

AmResearch is maintaining its net asset value (NAV) of RM4.61 for E&O, but narrowing the discount to 15% from 35% previously, hence raising its fair value to RM3.90.

The company announced that its subsidiary, Tanjung Pinang Development Sdn Bhd, had received the approval in principal from the DOE for the detailed environmental impact assessment (DEIA) study and conceptual masterplan of STP.

The DEIA conditional approval is applicable only to the proposed reclamation of 760 acres (307.60ha) of man-made islands and 131 acres (53ha) of the Gurney Drive foreshore, and dredging activities at the “flushing channel”.

Among other terms, it was only valid for two years from the date of issuance, the company stated.

With the approval in principle from the DOE in the bag, E&O now needs to get clearance from the state government before it can start work on phase two. However, approval from the state is not expected to be an issue. STP2 is 78.8% owned by E&O, with the balance 21.2% by the Penang Government.

Under STP1, E&O has already reclaimed some 239 acres (97ha) for development.

AmResearch said that financing for the reclamation was not an issue, given E&O’s strong balance sheet. It has a net gearing of 31% and access to strong global partners such as Mitsui Fudosan Residential Co Ltd and Temasek Holdings Pte Ltd.

“The approval from the Federal DOE is a very significant one. E&O may soon proceed to call for tender proposals for the reclamation of STP once it receives formal approvals from the Penang Government. Formal submission to the state government will soon be in motion,” said AmResearch.

“We expect STP2 to usher in a new era of exponential growth trajectory for E&O. STP2, with its high development potential and lucrative profit margin, is the primary valuation driver,” said AmResearch.

In an earlier report, HwangDBS property analyst Yee Mei Hui had mentioned that E&O was aiming to accelerate growth via RM1.5bil to RM2bil worth of annual launches for its financial year ended March 31, 2014 (FY14) to FY16, and RM3bil to RM4bil thereafter.

This is to achieve a sustainable net profit of RM270mil to RM300mil from 2017 onwards. Her target price of RM2.65 is based on a 40% discount to a revised NAV of RM4.40.

For the nine months to Dec 31, 2013, net profit dropped 31.55% to RM62.74mil on the back of a 39.33% drop in revenue to RM267.45mil. - The Star