- 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 is based on our conservative assumed land value of RM250psf for Sri Tanjung Pinang 2 (STP2). Our NAV model has yet to capture any development profits from STP2.

- Yesterday evening, the Penang state government has endorsed the masterplan of STP2. This validates our longstanding conviction of the deep development potential of STP2. E&O will now emerge as the largest land owner of prime seafront land in Penang, i.e. at Gurney Drive.

- The next step will be the calling of tenders, which will be held by 2HCY14 ahead of the commencement of reclamation works. Reclamation works are envisaged to start by 4QCY14.

- Datuk Terry Tham’s recent move to increase his stake in E&O from 5% to 15% reaffirms the management’s longterm commitment in ensuring the smooth execution of STP2.

- We also view that the endorsement is timely ahead of Temasek’s commitment to invest and develop Penang International Technology Park and Business Process Outsourcing Prime with Penang Development Corporation.

- A total of 891 acres of land will be reclaimed, comprising 131 acres along Gurney Drive and 760 acres at STP2.

Reclamation will be undertaken in two phases:- (i) Phase 1 (384 acres) – 131 acres along Gurney Drive, and 253 acres

at STP2; and (ii) Phase 2 – 507 acres at STP2.

- The break-even reclamation costs is estimated at RM85psf, after factoring the total 191 acres in STP2 and the area along Jalan Gurney to be given to the state government.

- As mentioned in our earlier report dated 5 June 2014, 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. This would in turn set a precedent in pricing land values in STP2 and trigger significant NAV upgrades.

- All said, we believe STP2 will do well, underpinned by its strategic location, scarcity of land on Penang island, the firm establishment of STP1 and improved accessibility (via the second Penang bridge and Penang undersea tunnel).

- The stock is currently trading at a steep 42% discount to its NAV of RM4.61/share.

Source: AmeSecurities