E&O’s STP2 expected to be endorsed this month

Eastern & Oriental Bhd

(June 5, RM2.75)

Maintain buy with target price of RM3.90: Following a recent luncheon meeting with management, we reaffirm our “buy” rating on E&O with an unchanged fair value of RM3.90 per share — a 15% discount to our net asset value (NAV) of RM4.61 per share, which includes our assumed land value of RM250 per sq ft (psf) for Phase 2 of the company’s Seri Tanjung Pinang (STP2) project. We have yet to impute development profits into our NAV model.

We see a more balanced shareholding structure after E&O managing director Datuk Terry Tham increased his stake in the company. Tham had recently announced that he would be acquiring a 10% stake from Sime Darby Bhd for RM2.90 per share, raising his stake to 15%. Sime Darby’s stake will be reduced to 22% after the disposal. 

Tham’s higher stake in E&O should demonstrate the management’s commitment to ensuring a smooth execution of STP2. The move will also promote greater alignment of interests between management and shareholders.

Management reaffirms that STP2’s master plan is expected to be endorsed by the Penang government this month. E&O is currently exploring funding options for the reclamation of land for STP2. 

Management also alluded that there is little need for equity fund raising given E&O’s strong balance sheet — net gearing of 30% as at financial year 2014 ended March 31 (FY14) — and the strong development potential of STP2.

Land was recently transacted at RM600 to RM700 psf in the Tanjung Tokong area in Penang where STP2 will be developed. What is more important now is the establishment of a benchmark land price for STP2. At the moment, there is a range of imputed land values for STP2 in the market. In our NAV model, we have assumed RM250 psf for STP2.

We believe that E&O may carve out select parcels for commercial developments, which will be sold to reputable global/regional developers once it commences reclamation works for STP2. Such a move will not only set a precedent in pricing land values in STP2 but also trigger significant NAV upgrades, we believe. This is a crucial share price driver.

Meanwhile, E&O is looking to step up prices for the remaining 250 terraced units at Avira in Iskandar Malaysia, Johor. Phase 1 of the project (208 units) achieved a 70% take-up at RM605 psf during a special preview. Demand for Avira is expected to remain strong. There is also interest among Singapore buyers given the project’s strategic advantage as the first landed development within Medini in Iskandar Malaysia.

The 20 residential units in E&O’s Princess House in London are fully sold. The company is still in negotiations for an en bloc sale of 34 serviced apartment units in the property.

The stock is currently trading at a steep 41% discount to its NAV of RM4.61 per share. — AmResearch, June 5