-  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 pleasantly surprised by E&O’s move to reward its shareholders with a proposed bonus issue (1-for-10), free detachable warrants (1-for-5) and a redeemable convertible medium term notes (MTN) issue.

-  The corporate exercise is expected to complete by 1QCY15. Post-exercise, its share base would increase by 30% to 1,483mil.

-  While valuations may not change with the bonus issue (up to 114.1mil), this may boost retail sentiment for the stock.

-  More importantly, the conversion price for the 5-year redeemable convertible MTN of up to RM350mil, will likely to be fixed at RM5.00/share, a significant premium of 67% to its last traded price of RM3.00/share.

-  Also, the detachable warrants of up to 228.2mil will be given free to all shareholders on a 1-for-5 basis, with anexercise price likely pegged at RM2.90/share. This coincides with the purchase price paid by Datuk Terry Tham and the management team to purchase a 10% stake in E&O from Sime Darby in July.

-  At the end of the warrant’s expiry of 4 years and 6 months from the date of issuance, the warrants proceeds will come in handy to fund the reclamation of STP2, we believe.

-  The distribution of free warrants together with the high conversion price of the convertible MTN should underpin share price from now on and at the same time, enlarge its market capitalisation.

-  Notwithstanding the above, the tender document for the reclamation of STP2 will be out soon and is expected to be awarded by December.

-  Once awarded, the reclamation costs will be fixed and this allows E&O to monetise select parcels of commercial land at STP2 via sale to established global developers to enhance land value. We believe there are no short of intrinsic buyers given the appeal of the land, underpinned by the scarcity of land on Penang island.

-  E&O remain as our top BUY. The stock is current trading at a discount of 37% vis-à-vis its NAV.

Source: AmeSecurities