AmWatch - Eastern & Oriental : Feedback from luncheon meeting BUY, 5 Jun 2014

STOCK FOCUS OF THE DAY

Eastern & Oriental : Feedback from luncheon meeting   BUY

Following a luncheon with management, we reaffirm our BUY rating on Eastern and Oriental Bhd (E&O) with an unchanged fair value of RM3.90/share – a 15% discount to our NAV of RM4.61/share, which includes our assumed land value of RM250psf for STP2. We have yet to impute development profits into our NAV model.

Datuk Terry Tan recently announced that he would be acquiring a 10% stake from Sime Darby for RM2.90/share, raising his stake to 15%. Sime Darby’s stake would be reduced to 22%. Datuk Terry’s increased stake in E&O should demonstrate the management’s commitment in ensuring a smooth execution of STP2. This move would also promote greater alignment of interests between management and shareholders.

Management reaffirms that the STP2’s master plan is expected to be endorsed by the Penang state government in June 2014. E&O is currently exploring funding options. Management alluded that there is little need for equity fund raising given E&O’s strong balance sheet – net gearing of 30% as at FY14 – and the strong development potential of STP2.

Land was recently transacted at RM600psf-700psf in the Tanjung Tokong area. 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 RM250psf for STP2.

We believe that E&O may carve out select parcels for commercial developments, which will be sold to reputable global/regional developers. Such a move will not only set a precedent in pricing land values in STP2 but also trigger significant NAV upgrades. E&O is looking to step up prices for the remaining 250 terrace units at Avira. Phase 1 (208 units) achieved a 70% take-up at RM605psf during the special preview. The stock is currently trading at a steep 41% discount to its NAV of RM4.61/share.

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