Biggest single-day fall in E&O shares after cash call plan

This article first appeared in The Edge Financial Daily, on February 13, 2019.
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KUALA LUMPUR: Eastern & Oriental Bhd’s (E&O) proposed cash call is seemingly not going down well with shareholders, judging by a rather heavy selldown that pulled down its share price by 22.02%, or 24 sen, to an eight-year low of 85 sen yesterday.

The over 20% slide is the biggest single-day fall in E&O’s share price at least in the past 10 years.

In view of the sharp fall, the property developer suspended the proprietary day trading and intraday short-selling activities for its shares after the lunch break, in efforts to curb some selling pressure.

The big drop in share price would not augur well for the pricing of the proposed fundraising consisting of share placement and renounceable rights issue, sweetened by a free detachable warrant, said analysts. E&O intends to raise up to RM550 million to fund its development projects and pare down borrowings.

In a note, PublicInvest Research analyst Tan Siang Hing said the fundraising is a “negative surprise”. Tan has cut the target price for E&O to RM1 from RM1.30 previously, to account for a dilution.

“This comes as a negative surprise as we had believed earlier that the group would raise funds by disposing of non-strategic assets and/or get more strategic partners for its Sri Tanjung Pinang phase 2 development,” said Tan.

Affin Hwang Capital analyst Loong Chee Wei said an overhang from the equity issuance will dampen sentiments on the stock in the short to medium term, but E&O’s long-term prospects remain good.

“The prospects for E&O remain good with the scheduled completion of the 253-acre (102.4ha) Sri Tanjung Pinang phase 2A by September 2019,” Loong wrote in a research note yesterday.

“Given the good long-term prospects and the current deep value, we reiterate our ‘buy’ call with a RM1.55 target price on a cum basis, based on a 50% discount to RNAV (revalued net asset value) of RM3.11. Key risks to our call are a weak take-up for the rights issuance and private placement, and prolonged weak property market conditions,” he added.

However, Loong expects the company’s substantial shareholders Datuk Seri Tham Ka Hon and the Tee brothers, the controlling shareholders of Kerjaya Prospek Group Bhd, will likely subscribe for the rights issue entitlement. Tham, the company’s deputy executive chairman, holds a 20.39% stake, while the Tee brothers own 15.08% and Sime Darby Bhd 11.94%.

Other substantial shareholders are the newly set up Urusharta Jamaah Sdn Bhd, which has taken over some assets from Lembaga Tabung Haji, holding a 7.22% stake; and Kumpulan Wang Persaraan (Diperbadankan) or KWAP holding 7.52%.

To recap, E&O’s cash call involves issuing up to 10% of its issued share capital of 1.31 billion shares. The renounceable rights issue will include free detachable warrants on an issue price and basis to be determined later.

Based on an illustrative price of RM1.20 per share, one rights stock for every four existing E&O stocks and one warrant for every two stocks, E&O expects to raise between RM250 million and RM550.3 million.

Of the funds raised, as much as RM300 million will be allocated for property development and/or reclamation, and RM200 million to repay borrowings.

Among the projects that E&O will fund are the Sri Tanjung Pinang phase 2, and the upcoming residential property projects in Kuala Lumpur such as The Conlay and The Peak.