Eastern & Oriental (BUY) & Malaysia Airports Holdings HOLD, 3 Oct 2014

Eastern & Oriental :

Buying opportunity in a weak market  BUY

We reaffirm BUY on Eastern and Oriental Bhd (E&O) with an unchanged fair value of RM4.00/share, based on a 15% discount to our NAV of RM4.73/share. Our NAV model is based on a conservative assumed land value of RM250psf for Sri Tanjung Pinang 2 (STP2) and has yet to capture any development profits from STP2.

E&O share price has retraced from its recent peak of RM3.18/share in July. We are unmoved by this given that the fundamentals of E&O remain intact. We view the share price weakness as a good buying opportunity ahead of the crystallisation of STP2. Subject to relevant authorities’ approval, E&O expects to hold an EGM by this year for the approval of the redeemable convertible medium term notes (MTN) issue and free detachable warrants. 

As a recap, E&O had in September proposed a corporate exercise involving a bonus issue (1-for-10), free detachable warrants (1-for-5) and a 5-year redeemable convertible medium term notes (MTN) issue of up to RM350mil. The ex date is expected to be in January 2015. The exercise price for the warrant is likely to be pegged to RM2.90/share, while the conversion premium of the MTN is likely to be fixed at RM5.00/share, at a huge premium of 82% to yesterday’s closing price.

The visibility of STP2 is now further enhanced as the calling for reclamation tender is targeted to be held by November. E&O expects to award the tender in January 2015 and to start reclamation works in February. Our estimated breakeven land cost is RM85psf, based on the gross land area. This includes 760 acres at STP2 and 131 acres along Gurney Drive.

We expect E&O to carve out land parcels for commercial development to be sold to established regional developers to enhance land value. This would set a precedent in pricing land values in STP2 and trigger significant NAV upgrades. E&O is trading at a steep discount of 42% vis-a-vis its NAV. We believe this is unjustified, given the NAV upside arising from STP2.

Others:

Malaysia Airports Holdings : Mulling over 2nd ROFR on Turkey airport stake HOLD

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