- We reaffirm our BUY rating on Eastern and Oriental Bhd (E&O) with an unchanged fair value of RM4.00/share, based on a 15% discount to our NAV of RM4.73/share. Our NAV model is based on a conservative assumed land value of RM250psf for Sri Tanjung Pinang 2 (STP2) and has yet to capture any development profits from STP2.

- We are unmoved by the share price retracement from its recent peak of RM3.18/share in July. Our conversations with management revealed that its fundamentals remain intact and the progress of STP2 is coming along nicely. E&O is in the midst of finalising the tender documents for reclamation of STP2 and the calling of tender is expected to take place by November.

- E&O’s EGM will be held on 19 September for shareholders to decide on the proposed acquisition of 135 acres of land at Elmina West for RM239mil from Sime Darby, its single largest shareholder with a 22% stake. Subject to the necessary approvals, the acquisition is expected to be completed within 59 months (2QCY19).

- To recap, E&O’s entry cost for Elmina West is RM41psf (including conversion premium), comprising land cost of RM33psf and infrastructure cost of RM8psf. This is viewed as fair, given that land prices within the vicinity are transacted at above RM100psf (i.e. Kwasa Land’s reserve price is RM300psf).

- E&O will undertake a wellness-themed mixed development at Elmina West in five staggered phases over a seven-year period. Management alluded to the maiden launch being expected in 2017, upon approvals for the master layout plan and conversion of land use.

- The residential component (~76%) is to be developed on 47 acres comprising 1,150 units (i.e. semi-detached, cluster, double storey link houses, condominiums and serviced apartments), while the commercial component (~24%) will be based on a 3x plot ratio on 15 acres of land.

- Assuming that the acquisition is to be funded by 100% debt, E&O’s net gearing is expected to rise to 0.5x from 0.3x in FY14.

- This would represent E&O’s first foray into the township segment in the Klang Valley. We are positive on this development, underpinned by an expanding upgraders’ market. The rising property prices and land value are pushing sizeable township developments beyond the city centre. Accessibility to this strategic location is further enhanced by a new DASH highway and MRT.

- E&O is trading at a steep discount of 42% vis-a-vis its NAV. We believe this is unjustified, given more NAV upside from STP2 and its increasing presence within the Klang Valley.

Source: AmeSecurities