AmWatch - Eastern & Oriental : STP2 moves closer to realisation, 3 Apr 2014

STOCK FOCUS OF THE DAY

Eastern & Oriental : STP2 moves closer to realisation     Buy

We reaffirm our BUY recommendation on Eastern & Oriental (E&O) with an unchanged fair value of RM3.00/share – a 35% discount to our NAV of RM4.61/share, including the significant accretion from Seri Tanjung Pinang 2 (STP2). Stripping off STP2, our NAV stands at RM1.36/share.

A local daily reported that E&O’s share price has risen to reflect the progress in STP2, and the timeline of events of its STP project. This news does not come as a surprise given that our key investment thesis on E&O is centred on the crystallisation of STP2 given the tripling of NAV and the deep development potential of the 760 acre prime land, located opposite the highly successful STP1.

At present, E&O is awaiting the Department of Environment’s (DOE) approval for the Detailed Environment Impact Assessment (DEIA) study on the commencement of reclamation works on STP2. This follows the conditional approval obtained from the Penang state government in April 2011.

DOE’s approval is expected to be granted in 2QCY14, while reclamation works is envisaged to begin in 2HCY14. E&O completed the public display on the DEIA study last Friday. STP2 is expected to be developed over 15 years. As a recap, we estimate the total land cost at RM2.4bil, which includes the reclamation cost (STP2 and Gurney Drive) and infrastructure and bridge cost.

Our break-even land cost is estimated at RM85psf – reclamation cost of RM50 psf and RM15 psf for STP2 and Gurney Drive, respectively, and infrastructure cost at RM20psf.

We recommend investors to accumulate E&O ahead of the sustained newsflow momentum as STP2 moves closer to realisation. This may lead to a narrowing of the current NAV discount of 52% via an accelerated share price discovery of its fair value.

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