AmWatch - Eastern & Oriental : Third property exposure in London BUY, 20 Jan 2015

STOCK FOCUS OF THE DAY

Eastern & Oriental : Third property exposure in London                 BUY

We affirm our BUY rating on Eastern and Oriental Bhd (E&O) with an unchanged fair value of RM4.73/share, based on a 50% discount to our NAV of RM9.47/share. Our NAV is based on an assumed land value of RM500psf for Sri Tanjung Pinang 2 (STP2). E&O announced the proposed acquisition of two office buildings known as Landmark House (located at Hammersmith Bridge Road) and Thames Tower (located at Blacks Road) from GEMS Hammersmith (Luxembourg) SARL for £57mil (£421psf) or RM309mil.

These properties are located at the West of London. Currently, the two existing and connected office buildings occupy 1.2 acres with a net internal area of 135,448sf. Thames Tower is an eleven-storey building while Landmark House has fifteen storeys. Subject to obtaining the relevant approvals (within 12 months), E&O plans to redevelop these building into residential developments, similar to the successful Princess House. The potential GDV for this redevelopment is £129mil or RM699mil.

The acquisition is expected to complete by 13 March 2015 and will be funded through 70% bank borrowings and 30% internal generated fund. Based on our ground checks, the average selling prices for apartments within the vicinity at London W6 are £1,100-£1,200psf.

We are maintaining our EPS estimates and BUY recommendation. Our NAV model excludes the proposed acquisitions of Landmark House and Thames Tower.  The reclamation of STP2, which is expected to commence in April 2015, should kick start a share price re-rating cycle. The litmus test for E&O is the monetisation of land value at STP2 to establish a benchmark price. Renewed buying interest appears imminent. The stock is trading at a deep discount of 74% to its NAV. This is unjustified given the significant accretion to NAV from the reclamation of STP2.

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