AmWatch - Eastern & Oriental : Moving towards transparency of land values with reclamation award for STP II BUY, 29 Oct 2015

STOCK FOCUS OF THE DAY

Eastern & Oriental : Moving towards transparency of land values with reclamation award for STP II          BUY

We maintain BUY on Eastern & Oriental (E&O) with an unchanged fair value of RM2.78/share (50% discount to our FD NAV). E&O finally announced the award of reclamation works for Phase 2A of its STP2 development to China Communications Construction Co Ltd (CCCC) for RM1bil over a period of 30 months.

Under Phase 2A, E&O will reclaim 253 acres of prime sea-fronting land along with another 131 acres at Gurney Drive – the latter is to be given to the Penang government. CCCC also has a conditional award to undertake reclamation works for Phase 2B & 2C (507 acres) for RM1.3bil. This is however subject to:- (i) a review of its performance after six months from Phase 2A’s commencement; and (ii) approval from the board of Tg. Pinang Development/E&O and relevant authorities. We cut our FY16F/17F/18F net profit forecast by 2%-19% to account for higher interest expense from debt funding of Phase 2A. We have yet to impute any profit accretion from potential land sales, to be conservative. 

At RM62psf, the reclamation cost works out to be RM1bil. Assuming basic infrastructure cost of RM30psf (including the two bridges linking STP2 to STP1 and Gurney Drive), we estimate the total cost at RM1.5bil. This translates into an implied break-even land cost of RM139psf on the balance 253 acres of land that is attributable to E&O (excluding the 131 acres due to the Penang government).This is very attractive on two counts. It is significantly below the transacted prices for big land deals. For example, 33 acres in IJM’s The Lights Phase 2 was sold to the IJM-Perennial Real Estate JV for RM403mil or RM280psf in August 2014. Furthermore, the approved plot ratio for STP 2 is 2x versus 1x in STP 1. The reclamation works will be debt funded. We estimate E&O’s net gearing to rise from 0.6x in FY16F (March) to 1.1x-1.5x in FY17F-18F. But, we are not concerned as E&O can pre-sell the land.

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