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This article first appeared in The Edge Financial Daily on February 13, 2019

Eastern & Oriental Bhd
(Feb 12, 85 sen)
Maintain neutral with a target price (TP) of RM1:
Eastern & Oriental Bhd (E&O) has proposed a private placement of new shares of up to 10% of the existing share capital and rights issue of shares with warrants. The equity issuance is to raise RM250 million to RM550 million, mainly to reduce borrowings and finance its property development projects. We believe an overhang from the equity issuance will dampen sentiments on the stock in the short to medium term.

 

However, E&O’s long-term prospects remain good with the scheduled completion of the 253-acre (102.39ha) Seri Tanjung Pinang phase 2A (STP2A) project by September 2019.

The proposed private placement and rights issue is to raise minimum gross proceeds of RM250 million in the minimum scenario and RM550 million in the maximum scenario. The rights issue allocation basis and issue prices of the private placement and rights issue will be determined closer to the planned completion of the corporate exercises by the first quarter of 2019 (1Q19) and 3Q19 respectively.

We gather that entrepreneurs and substantial shareholders Datuk Seri Tham Ka Hon owning a 20.6% stake and Datuk Tee Eng Ho/Tee Eng Seng with a 15.2% stake, will likely subscribe for their rights issue entitlement. This will show their commitment and shore up support for the proposed equity issuances.

According to an announcement, the corporate exercise will reduce its net gearing of 0.61 times as at end-financial year 2018 (FY18) to 0.42 times in the minimum scenario and 0.24 times in the maximum scenario (before the exercise of warrants to be issued), based on the indicative issue prices for the private placement at RM1.12 and the rights issue at RM1.20.

The indicative rights issue basis is one right share for every four existing shares held with two free warrants to be issued for every two rights shares subscribed. The equity issuances will support E&O’s plan to launch new projects this year while keeping its gearing at a manageable level.

Given the good long-term prospects and the current deep value, we reiterate our “buy” call with a TP of RM1.55 on a cum basis, based on a 50% to revalued net asset valuation of RM3.11. A key risk to our call is a weak take-up for the rights issuance and private placement, and a prolonged weak property market conditions. — PublicInvest Research, Feb 12

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