KUALA LUMPUR (Jan 20): Alliance DBS Research has downgraded Eastern & Oriental Bhd (E&O) to "hold" from "buy" and cut its target price (TP) to RM2.50 from RM3.20 previously.

"The downgrade and lower TP is after the expanding valuation discount and adjusting for 1-for-10 bonus issue," a  research report on Tuesday.

The research house noted  the proposed acquisition would be funded mostly by borrowings, which stood at 70% of total transaction value.

"While funding is not an issue, gearing will surge in view of the massive reclamation works for the first phase of Seri Tanjung Pinang 2 (STP2) involving 384 acres, of which 131 acres is for the Penang state government, which will commence by March," it said.

"The project is estimated to cost up to RM2.5 billion over the next two years. We expect net gearing to rise to 88% by financial year 2016 (FY16)," Alliance DBS said.

Despite noting E&O (fundamental: 1.5; valuation: 0.6) has secured a RM250 million sales for first half of financial year 2015 (1HFY15), Alliance DBS estimates that E&O may miss their FY15 sales target of RM1 billlion given the soft market sentiment with investors remaining cautious of  property investment, especially high-end properties.

Alliance DBS also trimmed E&O's FY15, FY16 and FY17 earnings forecast by 2%, 7% and 11% respectively after adjusting for higher interest arising from the larger borrowings.

According to the bank's projection, E&O may register a net profit of RM90 million, RM137 million and RM131 million for FY15, FY16 and FY17. It may pull in RM596 million, RM756 million and RM896 million in revenue for FY15 to FY17 respectively.

The firm also trimmed Revalued Net Asset Valuation (RNAV)-derived TP to RM2.50 after expanding the discount factor to 50% from 40% and adjusting for the 1-for-10 bonus issue.

In a statement yesterday, E&O said it is adding two more properties to its London portfolio by acquiring vintage office buildings Landmark House and Thames Tower for a total of ¢G57 million (RM309 million).

The company said its wholly-owned subsidiary, Hammersmith Properties Ltd, last Friday signed a property sale contract with Gems Hammersmith (Luxembourg) Sarl.

The agreement was for Hammersmith Properties to acquire Landmark House and Thames Tower, which sit on 1.2 acres (0.4856ha) in Hammersmith Bridge Road. The two buildings, which were constructed in the 1960s, are close to the A4, the principal road connecting central London to Heathrow Airport.

There is a total net internal area of 135,448 sq ft between Landmark House and Thames Tower.

As at 11.31am, E&O fell 4.89% or 11 sen to RM2.14 with 1.22 million shares done.