Eastern & Oriental Bhd
(March 23, RM2.06)
Maintain neutral with a target price (TP) of RM2.20: Eastern & Oriental (E&O) has entered into a 51:49 joint venture (JV) with Japan-based real estate company Mitsui Fudosan Asia Pte Ltd (Mitsui) to develop its Jalan Conlay project in Kuala Lumpur. As a result of the JV, E&O will be able to realise a net gain of RM48.8 million in its fourth quarter ending March 31, 2015 (4QFY15).
The 1.43 acre (0.58ha) site at Jalan Conlay is valued at RM3,250 per sq ft in the JV. The project will comprise 298 serviced apartments worth RM800 million in gross development value, at an indicative pricing of above RM2,000 psf. The project will integrate with the wellness theme, creating a new city-living concept. With this partnership, E&O will be able to tap into Mitsui’s network in Japan and hence create greater awareness of the E&O brand in the Japanese market. E&O deputy managing director Eric Chan said that the previous JV project — The Mews — was almost fully sold (non-bumiputera units) before the units were marketed in Japan in the past. Hence, this Jalan Conlay project will be a “new offering” in Japan by E&O, upon its launch by December 2015.
The management indicated that the reclamation tender for Seri Tanjung Pinang 2 is expected to be awarded only in May/June as the bidders requested for a time extension. Therefore, major news flow, including partnership with a financial investor, may come only in late 2Q15.
We raise our FY15 reported net profit forecast to incorporate the net gain arising from the JV. After we adjust our revalued net assets value (RNAV) to factor in the net gain and JV stake, our TP is revised down to RM2.20 (from RM2.42) as we raise our discount to RNAV to 50% (from 45%). Although E&O can realise an upfront gain, the outlook for core operating earnings remains weak as the sector continues to see further weakness in demand coupled with financing tightening from the banks. — RHB Research, March 23
This article first appeared in The Edge Financial Daily, on March 24, 2015.