- We maintain our BUY rating on Eastern and Oriental Bhd (E&O) and raise our fair value from RM3.00/share to RM3.90/share – based on a 15% discount (previously 35%) to our unchanged NAV of RM4.61/share.

- We have assigned a significantly lower discount to our NAV as regulatory risks dissipate with the approval from the Department of Environment (DOE), Ministry of Natural Resources and Environment for the Detailed Environmental Impact Assessment (DEIA) study and conceptual masterplan for Seri Tanjung Pinang 2 (STP2).

- The approval from the Federal DOE is a very significant one; E&O may soon proceed to call for tender proposals for the reclamation of STP (760 acres) once it receives formal approvals from the Penang state government. The latter had already granted E&O conditional approval for STP2 in April 2011. Formal submission to the state government would soon be in motion.

- STP2 involves the reclamation of some 760 acres of prime sea-front land to create man-made islands just opposite its high-end residential project STP1 in Tanjung Tokong, Penang. STP2 has a very high development potential because of its strategic location, sea-fronting land, exciting development concept, and enticing architectural designs.

- As it is, E&O’s STP1 is already a landmark project in Penang and is well sought after by both locals and foreigners. We expect STP2 to usher in a new era of exponential growth trajectory for E&O. STP2, with its high development potential and lucrative profit margin, is the primary valuation driver.

- In our earlier reports, we estimate that break-even reclamation costs to be about RM85psf, even after factoring the total 191 acres in STP2 and area along Jalan Gurney to be given to the state government. Based on a very conservative land price of RM250psf, we expect E&O’s value to more than triple to RM4.61/share.

- We note that smaller land parcels in nearby Jalan Kelawai and Tanjung Tokong were sold at around RM500-RM600psf. This is because residential prices in prime neighbourhoods have already surpassed RM1,000psf, implying reflating land values.

- And, our NAV of RM4.61/share for E&O does not factored-in any development profits for STP2. Total estimated GDV is c.RM25bil.

- Financing for reclamation is not an issue given E&O’s strong balance sheet (net gearing: 31% as at end-9MFY14) and access to strong global partners such as Mitsui Fudosan and Temasek.

Source: AmeSecurities