Tham’s stake increase should strengthen investors’ confidence in E&O

Eastern & Oriental Bhd (June 6, RM1.64)

Maintain neutral with an unchanged target price (TP) of RM1.60: Eastern & Oriental Bhd (E&O) group managing director Datuk Seri Terry Tham Ka Hon (pictured) is acquiring a 10% stake in E&O, comprising 125.9 million ordinary shares and 48.7 million convertible warrants from Sime Darby Bhd for RM327.54 million, raising his stake in E&O to 21% from 11% previously. Upon completion of the acquisition, Tham is effectively the single-largest shareholder of E&O, followed by Sime Darby with a 12% stake.

The acquisition of the 10% stake by Tham, which comprises 125.9 million ordinary shares valued E&O shares at RM2.60 each, a 64% premium to its last closing price of RM1.59 and a 67% premium to the five-day volume weighted average price of RM1.56. Nevertheless, the acquisition price of RM2.60 is at a 43% discount to our fully-diluted revised net asset value (RNAV) per share of RM4.60. We view this news as long-term positive for E&O as it reflects the key management’s continued conviction and confidence in E&O’s long-term value.

Recall that Tham will relinquish his post as group managing director and will be appointed executive deputy chairman effective July 1, 2016. The increase in Tham’s stake in E&O should strengthen investors’ confidence in the long-term growth prospects of E&O, especially with the all important Phase 2 of Seri Tanjung Pinang (STP2) project underway. We believe Tham will ensure the smooth execution of the STP2 project.

We maintain our earnings forecasts for financial year 2017 (FY17)/FY18. The stake acquisition by Tham is not expected to have an earnings impact on E&O. We maintain “neutral” with an unchanged TP of RM1.60, as the stake acquisition does not impact our RNAV valuation due to the unchanged number of E&O shares. We are keeping our steep discount of 65% to the RNAV due to a high net gearing of E&O. A potential catalyst could emanate from the securing of a level 1 strategic investor for STP2, which would unlock the value of E&O and reduce its net gearing. — MIDF Research, June 6

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This article first appeared in The Edge Financial Daily, on June 7, 2016. Subscribe to The Edge Financial Daily here.