E&O secures KWAP as strategic investor for STP2A project

Eastern & Oriental Bhd (March 31, RM1.93)

Upgrade to buy with a higher target price (TP) of RM2.68: Eastern & Oriental Bhd (E&O) announced that it has secured Kumpulan Wang Persaraan (Diperbadankan) (KWAP) as the level 1 strategic investor for the Seri Tanjung Pinang (STP) 2A project. A special purpose vehicle will be established to undertake the development and sale of the STP2A development land where KWAP will be taking a 20% equity stake for RM766 million, while E&O will hold the remaining 80% stake. Separately, E&O proposed to issue 66.1 million shares to KWAP, representing 5.3% of E&O’s existing enlarged share capital at an issue price within the range of RM1.84 to RM2.04. The STP2A land is valued at RM530 per sq ft (psf).

The 20% equity stake disposal to KWAP is equivalent to the value of eight plots of land in STP2A with a total land size of 1.45 million sq ft that will be sold to KWAP, valuing STP2A land at RM530 psf. The transacted price is a positive surprise, higher than our previous land value assumption of RM400 psf. We believe the value of reclaimed land in STP2A will be crystallised with the entry of KWAP as it provides a higher valuation benchmark for the whole STP2 project with total reclaimed land to be 760 acres (307.56ha).

We are positive about the monetisation of STP2A land and the placement exercise as it will improve the balance sheet of E&O. Post share placement (assuming a placement price of RM1.90) and receiving the 10% of disposal consideration, the net gearing of E&O is estimated to fall to 0.57 times from a high net gearing of 0.74 times as at the end of the third quarter of financial year 2017 (FY2017). FY2017 and FY2018 earnings estimates are unchanged as the first launch of property projects in STP2A will only take place in the second half of 2019.

We upgrade E&O to “buy” from “neutral” with a higher TP of RM2.68 after revising a higher value for the STP2 project in our revalued net asset value (RNAV) valuation. We have reduced our RNAV discount to 55% from 60% previously as we anticipate an improving balance sheet for E&O. We are turning positive about E&O as the entry of KWAP as strategic investor of STP2A unlocks the value of the STP2 project and further ensures the execution of STP2A, which is an all-important project to E&O. — MIDF Research, March 31

This article first appeared in The Edge Financial Daily, on April 3, 2017.

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