E&O in final negotiations to award reclamation contract

Eastern & Oriental Bhd (Sept 18, RM1.61)

Maintain buy call with an unchanged target price (TP) of RM2.54: Eastern & Oriental Bhd (E&O) is poised to award the reclamation contract for its Seri Tanjung Pinang (STP) Phase 2A project soon.

The Penang Transport Master Plan, which would be managed by the Gamuda Bhd-led consortium, should improve infrastructure and enhance the value of Penang property in the long run. The listing of E&O plc would likely reduce the group’s gearing. We reiterate our “buy” call on E&O and our TP of RM2.54, based on a 40% discount to revalued net asset valuation (RNAV).

We understand that E&O is in final negotiations to award the reclamation contract for its STP Phase 2A (253 acres [102.39ha]) project soon. The delay in concluding negotiations is due to the intricacy of the reclamation contract pricing, which is expected to be more attractive due to the fall in construction and fuel costs.

It is also in final negotiations with banks to provide financing for the project. The bank borrowings would only be drawn down as the reclaimed land is delivered by the contractor in stages.

Once a reclamation contractor is appointed, E&O would seek a strategic partner for the project that would take up to an effective 27.8% stake in STP Phase 2A. E&O would retain at least a 51% stake, while the Penang state government would hold the remaining 21.2% interest. E&O targets to secure a partner within six months to provide financial support for the project and partially unlock the value of its land reclamation rights.

E&O plans to seek shareholder approval for the listing of E&O plc on the AIM market of the London Stock Exchange in the upcoming annual general meeting or extraordinary general meeting on Sept 29. E&O’s stake in E&O plc would be reduced to 30% from 100%, while group net gearing would fall to 0.38 times from 0.6 times as at financial year 2015. We estimate that the listing of E&O plc would potentially enhance E&O’s RNAV by 9% to RM4.52.

E&O’s current price per RNAV of 0.4 times is at a sharp discount to the sector average of 0.6 times. The appointment of a reclamation contractor for Phase 2A of its STP project in the third quarter of 2015 should kick-start the project that contributes 42% of our RNAV per share of RM4.23.

We maintain our “buy” call with a TP of RM2.54. Key risks include slow property sales and execution risk to the STP project. — Affin Hwang Capital, Sept 17

This article first appeared in the digitaledge DAILY on Sept 21, 2015. Subscribe here.