Eastern and Oriental Bhd
(Jan 20, RM2.14)
Downgrade to hold with a lower target price (TP) of RM2.50 from RM3.25: Eastern and Oriental (E&O) announced that it has entered into a contract to acquire two interconnected office buildings in London, known as Landmark House and Thames Tower, for £57 million (RM311.7221 million). The buildings are located on a 1.2-acre (0.48ha) site on Hammersmith Bridge Road. The deal is expected to be completed by March 13, 2015. The proposed acquisition will be funded mostly by borrowings (70% of transaction value).

While funding is not an issue, gearing will surge in view of the massive reclamation works for the first phase of Seri Tanjung Pinang 2 development project (involving 384 acres, of which 131 acres is for the Penang state government) which will commence by March. The project is estimated to cost up to RM2.5 billion over the next two years.

We expect net gearing to rise to 88% by financial year 2016 (FY16). E&O has secured RM250 million sales for the first half of FY15. Given the soft sentiment, it may miss its FY15 sales target of RM1 billion as investors remain cautious of investment property, especially high-end properties.

We trim FY15, FY16 and FY17 earnings by 2%, 7% and 11% respectively after adjusting for higher interest arising from the larger borrowings. We also trim revalued net asset value-derived TP to RM2.50 after expanding the discount factor to 50% (from 40%) and adjusting for the one-for-10 bonus issue (ex Jan 20).

We downgrade E&O to “hold”.— Alliance DBS Research Sdn Bhd, Jan 20

This article first appeared in The Edge Financial Daily, on January 21, 2015.