- We reaffirm our BUY rating on Eastern and Oriental Bhd (E&O) with a higher fair value of RM4.07/share (vs. RM4.00/share previously), based on a 15% discount to our NAV of RM4.81/share, following the proposed acquisition of ESCA House situated at the popular Bayswater, in Zone 1 London.

- E&O has entered into a Share Purchase Agreement with TLH Investments Ltd and Lead Pacific Inc Ltd to purchase 100% equity interest in Loxley Holding Management Limited. Loxley has earlier contracted to purchase ESCA House for £27.7mil (£1,024psf) or RM147.4mil. The acquisition is expected to be completed by end-November.

- Dato’ Terry Tham, who is the Managing Director of E&O, is a related party as he is the sole shareholder and director of TLH. TLH holds a 51% equity interest in Loxley.

- More importantly, there is no premium paid to Dato’ Terry’s private vehicle, LTH, for ESCA House. Dato’ Terry acquired ESCA House under his own personal capacity due to time constraint to seal the deal. Should the acquisition be done directly by E&O, it would have exceeded the stipulated time frame given the lengthy process involved in obtaining board and shareholders’ approval.

- ESCA House is a low built office and residential building with 27,000sf of gross internal area. Subject to obtaining planning permission (within 18 months), E&O intends to redevelop ESCA House into a six-level residential development comprising 28 units by extending it to 36,000sf, similar to its successful maiden foray at Princess House.

- We are positive on the deal given its strategic location within Zone 1, at Bayswater, West of Central London. We think that the selling price for ESCA House is likely to come in above £2,000psf, higher than Princess House’s £1,800psf. ESCA House is expected to be launched earliest in FY17.

- Following E&O’s proven track record with the successful launch of Princess House, we believe ESCA House would similarly be well-received. We estimate a GDV of RM400mil, compared to Princess House’s RM300mil. On our estimate, the net profit should be about RM70mil, to be recognised from FY18F onwards. The deal would add about RM0.07/share to our NAV.

- We are unmoved by the recent share price weakness which we attribute to order-driven selling in a weak broader market. Fundamentally, E&O is on track to complete its bonus, warrants and bonds issuance; EGM is expected to be held towards end-November. Reclamation tender for STP2 would soon follow suit.

- E&O is trading at a steep discount of 47% vis-a-vis its NAV. This is unjustified, given its significant accretion to NAV from STP2, underpinned by the lucrative margin between its breakeven land cost and realisable land values.

Source: AmeSecurities