- We reaffirm our BUY rating on Eastern and Oriental Bhd (E&O) with a higher fair value of RM4.00/share (vs. RM3.90/share previously), based on a 15% discount to our NAV of RM4.73/share. This is to factor in the new land purchase at Elmina West.

- E&O has entered into a sale and purchase agreement with Sime Darby to acquire 135 acres (GDV: RM1.5bil) of freehold land in Elmina West for RM239.8mil. The land deal is expected to be completed within 59 months (by 2QCY19).

- E&O intends to develop the land into a wellness-themed mixed development (comprising commercial and residential). The land acquisition is positive and will be the first township development in Klang Valley for E&O.

- E&O’s entry cost of RM40.78 psf (includes conversion premium) comprising land cost (RM32.78 psf) and infrastructure costs (RM8 psf) is attractive. Land prices nearby are transacted above RM100 psf – the nearby Kwasa Land’s reserve price is RM300 psf.

- Sime Darby will obtain the necessary relevant approvals (conversion of land use for mixed development and master layout plan) and develop the major infrastructures. E&O has agreed to share the actual amount of GDV that exceeds the estimated baseline GDV of RM1.5bil, on a 80:20 ratio with Sime Darby.

- E&O paid RM24mil (10% of the purchase consideration) as deposit via internal cash. Net gearing remains manageable given the staggered payments for the remaining 90% over five years, assuming 100% debt funding. The next payment will be executed 21 months later (in FY17). We have included these in our earnings forecast.

- We believe that demand for this project would be supported by an expanding upgraders’ market, given the emerging trend where rising property prices and land value are pushing sizeable township developments beyond the Klang Valley city centre. Accessibility is also further enhanced by a new highway (DASH) and MRT.

- Separately, E&O is in the midst of unlocking the value of its 1.4 acres of land at Lot 393, Section 63 on Jalan Kia Peng (also known as the Conlay land) located behind Prince Court Medical Centre. E&O is mooting for the development of two blocks of serviced apartments (total of 298 units), and a basement floor for retail outlets (GDV: RM820mil).

- E&O has submitted the application for planning permission to DBKL. More importantly, we believe that E&O would develop the project with an established partner to leverage on the latter’s strong branding and global database.

- All said, the stock is currently trading at a steep 42% discount to its NAV of RM4.73/share.

Source: AmeSecurities