- We reaffirm our BUY rating on Eastern and Oriental Bhd (E&O) with an unchanged fair value of RM3.90/share – a 15% discount to our NAV of RM4.61/share, which includes the significant accretion from Seri Tanjung Pinang 2 (STP2). Stripping off STP2, our NAV stands at RM1.36/share.

- E&O reported 4QFY14 earnings of RM51mil to end its FY14 earnings at RM113mil. Excluding EIs, the results were below expectations as FY14 revenue was weakened by 18% due to lower revenue recognition from current projects and delays for its key projects.

- E&O’s earnings are academic at this juncture, as our investment thesis is centred on STP2 given the significant NAV expansion to RM4.61/share from RM1.36/share. Our NAV also has not factored in any development profits for STP2. Note that the final approval from the Penang state government for STP2’s master plan and reclamation notice are estimated to be granted in 3Q-4QCY14.

- The group proposed a first and final single-tier dividend of 3.0sen for FY14.

- E&O is reaccelerating pre-sales during this financial year (with the maiden launches of Avira and Andaman Edition 18) in anticipation of pent-up demand following the implementation of cooling measures last October. We introduce our FY17F earnings at RM232mil.

- FY14 new sales are dominated by The Mews developments in Klang Valley, making up 55% of total new sales in FY14. This is followed by those in Penang (i.e. Quayside and Andaman Towers). New sales for FY14 alone totalled RM630mil, while unbilled sales stood at RM900mil.

- FY15 started off well for E&O, with its much-awaited Avira project in Medini Zone B achieving 70% take-up for the 208 units on offer during the special preview. It comes in one size – 27’x65’ in built-up of 2,215sf and 2,249sf – with prices starting from RM1.35mil or RM605psf (fully-fitted units). We expect demand for Avira to remain strong, including interest from Singapore as Avira comprises the first landed homes to be launched within Medini. More importantly, the special tax and incentive packages offered at Medini would provide a kicker for E&O.

- We believe its cumulative profit target of RM450mil over FY14-FY16 is achievable. Stronger revenue recognition from The Mews, Avira, Andaman Series and Princess House will filter through during the period. Note that profit recognition from Princess House (only 1 unit unsold for individual sales) will only be reflected in FY16; E&O are still in negotiations for the en-bloc sales.

- At present, the stock is trading at a steep 50% discount to its NAV of RM4.61/share.

Source: AmeSecurities