Eastern & Oriental’s proposed AIM listing terminated

Eastern & Oriental Bhd (April 21, RM1.59)

Maintain trading buy with a lower target price (TP) of RM2.20: Eastern & Oriental Bhd (E&O) confirmed that it will terminate the proposed listing of its overseas assets due to unstable global market conditions and exchange-rate volatility. It was reported earlier that it might defer the listing due to the weak UK stock market conditions.

To recap, the group had earlier planned to list its overseas assets on the Alternative Investment Market (AIM) of the London Stock Exchange, which would serve as its UK platform to invest abroad and also deconsolidate its debt (the net debt is expected to be reduced to 0.54 times with the proposed listing).

Now, with the listing terminated, the group’s net gearing is expected to be hovering at about 0.7 times. We understand that the group would incur about £1.4 million (RM7.81 million) cost in relation to the proposed flotation. As such, we adjusted our financial year 2016 net profit by about -9% to account for the listing cost. This came as a negative surprise for us as we had expected the group to deconsolidate its overseas debt to lighten its balance sheet. Its net gearing as at third financial quarter ended Dec 31, 2015, stood at about 0.7 times, which could go higher if presales are slower than expected or the timing for the Sri Tanjung Pinang Phase 2 strategic partnership is taking longer than expected.

We maintain “trading buy”, but lower our TP to RM2.20 (from RM2.60 previously), pegged higher at about 40% discount to our revised net asset value estimate of RM3.70 per share. We are of the opinion that developers should maintain strong balance sheets, especially in this difficult trading environment.

Earnings will be slow in the interim, given current soft demand and the newly launched projects are still at preliminary stages. — PublicInvest Research, April 21

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This article first appeared in The Edge Financial Daily, on April 22, 2016. Subscribe to The Edge Financial Daily here.