E&O shares up on expectation that Elmina West deal will be approved at EGM

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KUALA LUMPUR (Sept 4): Eastern & Oriental Bhd (E&O) shares rose 6.6% on Thursday morning, on expectation that the company’s proposed acquisition of a piece of freehold land in Elmina West, Sungai Buloh, will be approved by shareholders on Sept 19.

E&O had announced in early July that Sime Darby Bhd — which is its single largest shareholder with a 22% stake — is in talks to sell to the company 135 acres of land in Elmina West for RM239.8 million.

The 135 acres is part of a 5,000-acre land, earmarked for the City of Elmina commercial and residential township project.

E&O shares rose by as high as 21 sen or 7.14% to RM2.94 in early trade, before giving up part of the gain to end the morning session, with an 18 sen gain at RM2.91, with 3.46 million shares done.

Even with the reduced gain, E&O was the fourth biggest gainer on Bursa Malaysia’s.

In a note to client Thursday, AmResearch reaffirmed its rating on the counter with an unchanged fair value (FV) of RM4.00 per share, based on a 15% discount to net asset value (NAV) of RM4.73 per share.

"Our NAV model is based on a conservative assumed land value of RM250psf for Sri Tanjung Pinang 2 (STP2) (project in Penang), and has yet to capture any development profits from STP2," said AmResearch analyst Tan Ee Zhio.

"We are unmoved by the share price retracement from its peak of RM3.18/share in July. Our conversations with management revealed that its fundamentals remain intact and the progress of STP2 is coming along nicely," Tan said.

Tan noted that E&O is in the midst of finalising the tender documents for reclamation of STP2, and the calling of tender is expected to take place by November.

"We also acknowledged that E&O will call for an extraordinary general meeting (EGM) on Sept 19, for shareholders to decide on the proposed acquisition of 135 acres of land at Elmina West, for RM239 million from Sime Darby," he added.

To recap, E&O’s entry cost for Elmina West is RM41psf (including conversion premium), comprising land cost of RM33psf and infrastructure cost of RM8psf.

Tan said: "This is viewed as fair, given that land prices within the vicinity are transacted at above RM100psf (Kwasa Land’s reserve price is RM300psf)."

It is understood that E&O will undertake a wellness-themed mixed development at Elmina West, in five staggered phases over a seven-year period.

Tan pointed out that E&O is trading at a steep discount of 42% vis-a-vis its NAV.

"We believe this is unjustified, given more NAV upside from STP2 and its increasing presence within the Klang Valley," he said.

According to AmResearch's projection, E&O's revenue and net profit for the year ending March 31, 2015, will be RM683.7 million and RM144.8 million respectively.

The numbers are expected to be even higher in FY16 at RM870.1 million and RM194.5 million respectively, it said.