Eastern & Oriental Bhd
(Nov 4, RM2.74)
Maintain “buy” with unchanged fair value of RM4: We reaffirm our “buy” rating on Eastern & Oriental (E&O) with an unchanged fair value of RM4 per share, based on a 15% discount to our net asset value (NAV) of RM4.73 per share.

Our NAV model is based on a conservative assumed land value of RM250 per sq ft (psf) for Penang’s Sri Tanjung Pinang 2 (STP2) and excludes any development profits from STP2.

E&O announced that the Securities Commission Malaysia (SC) had approved the issuance of 20-year redeemable convertible medium-term notes (MTN) and seven-year commercial paper, with a combined limit of up to RM500 million in nominal value.

E&O will hold an extraordinary general meeting (EGM) by end-November to seek approval for its corporate exercise comprising: (i) bond issue; (ii) 1-for-10 bonus issue of up to 114.4 million; and (iii) 1-for-5 warrants issue of up to 228.2 million.

The corporate exercise is expected to be completed in the first quarter of calendar year 2015.

As highlighted previously, we are positive over E&O’s move to reward its shareholders through the proposed bonus issue and free detachable warrants, which should underpin share price performance. The warrant’s exercise price is likely to be pegged to RM2.90 a share, while the conversion premium of the MTN is likely to be fixed at RM5 per share.

With the SC’s approval, E&O’s funding costs will be fixed for a period of five years (first issuance of convertible MTN of up to RM350 million). The funds to be raised will come in handy to fund the reclamation of STP2 and also its other key prolific projects in Avira Medini Iskandar and Elmina West.

The reclamation timeline for STP2 is well on track. E&O is currently at the pre-qualification stage and targets to award the reclamation tender in January.

Reclamation works are envisaged to commence in February, which would encompass 384 acres (155ha) under phase 1 (253 acres at STP2 and 131 acres along Gurney Drive).

E&O is likely to undertake a land sale for its select parcel of commercial land to an established global developer, we believe, to enhance STP2’s land value. This would in turn set a benchmark pricing for STP2.

We remain committed to our investment thesis on E&O in which we see significant accretion to its NAV from STP2, underpinned by the lucrative margin between its break-even land cost and the realisable land values. At current level, E&O is trading at a steep discount of 42% vis-a-vis its NAV. — AmResearch Sdn Bhd, Nov 4

This article first appeared in The Edge Financial Daily, on November 5, 2014.