- Following a luncheon with management, 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 our assumed land value of RM250psf for STP2. We have yet to impute development profits into our NAV model.

- We see a more balanced shareholding structure after the increase of Datuk Terry Tham’s stake in E&O. Datuk Terry recently announced that he would be acquiring a 10% stake from Sime Darby for RM2.90/share, raising his stake to 15%. Sime Darby’s stake would be reduced to 22%. Datuk Terry’s increased stake in E&O should demonstrate the management’s commitment in ensuring a smooth execution of STP2. This move would also promote greater alignment of interests between management and shareholders.

- Management reaffirms that the STP2’s master plan is expected to be endorsed by the Penang state government in June 2014. E&O is currently exploring funding options for the reclamation of STP2. Management alluded that there is little need for equity fund raising given E&O’s strong balance sheet – net gearing of 30% as at FY14 – and the strong development potential of STP2.

- Land was recently transacted at RM600psf-700psf in the Tanjung Tokong area. What is more important now is the establishment of a benchmark land price for STP2. At the moment, there is a range of imputed land values for STP2 in the market. In our NAV model, we have assumed RM250psf for STP2.

- We believe that E&O may carve out select parcels for commercial developments, which will be sold to reputable global/regional developers once it commences reclamation for STP2. Such a move will not only set a precedent in pricing land values in STP2 but also trigger significant NAV upgrades, we believe. This is a crucial share price driver.

- E&O is looking to step up prices for the remaining 250 terrace units at Avira. Phase 1 (208 units) achieved a 70% take-up at RM605psf during the special preview. Demand for Avira is expected to remain strong, including interest from Singapore given its strategic advantage as the first landed development within Medini.

- Princess House’s individual sales (20 units) are fully sold. E&O are still in negotiations for the en-bloc sales of 34 serviced apartment units.

- The stock is currently trading at a steep 41% discount to its NAV of RM4.61/share.

Source: AmeSecurities