Eastern and Oriental Bhd
(Jan 6, RM2.13)
Maintain “buy” with a target price of RM4.73: We reaffirm our “buy” rating on Eastern and Oriental (E&O) with an unchanged fair value of RM4.73 per share, based on 50% discount to our net asset value (NAV) of RM9.47 per share. Our NAV is based on an assumed land value of RM500 per sq ft (psf) for Sri Tanjung Pinang 2 (STP2) [pic].

E&O announced that the exercise price for the warrants have been fixed at RM2.60 per share. As part of its corporate exercise, E&O earlier announced a one-for-five free warrants and a one-for-10 bonus issue together with a bond issue (medium-term loan of up to RM350 million).

The entitlement dates for the warrants and bonus are yet to be determined, but are likely to be held towards end of January. 

Our check with the management indicates that the timeline to commence reclamation is well on track; the award of reclamation tender is expected by March 2015.

The open tender for reclamation works on STP2 will be called this month. This is viewed as a key catalyst for E&O given that reclamation costs would be fixed and will set a transparent break-even price for E&O, underpinned by STP2’s lucrative development. 

On our estimates, the break-even land cost is estimated at RM94 psf for gross land (or RM138 psf for net land). 

We believe that the current share price weakness represents a good buying opportunity for E&O. Given the current weak sentiment on property stocks, the litmus test for E&O is to crystallise land value in STP2 to establish benchmark prices. This, we think would significantly generate a renewed buying interest on the stock.

E&O remains as our top “buy”. The stock is trading at a steep discount of 77% vis-a-vis its NAV, which is unjustified, given the significant accretion to its NAV from the reclamation of STP2. — AmResearch Sdn Bhd, Jan 6.

This article first appeared in The Edge Financial Daily, on January 7, 2015.