- We reaffirm our BUY rating on Eastern and Oriental Bhd (E&O) with an unchanged fair value of RM4.07/share, based on a 15% discount to our NAV of RM4.81/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.

- E&O reported 2QFY15 core net profit of RM21mil, which brought 1HFY15 core earnings to RM40mil – accounting for 28% and 29% of our and consensus full-year estimates, respectively. We are not concerned as 2H should be significantly stronger.

- We expect a significant step-up in earnings from 2H onwards underpinned by lumpy profit recognition. This would be driven by Avira Garden Terraces 1 and particularly Block 1G of Andaman at Quayside (GDV: RM600mil) given that it is currently at 40% construction stage. This project was recently launched in the regional market, i.e. Taiwan, at a selling price of RM1,500psf.

- Other key projects to be rolled out in the next 12 months include the remaining Avira Terraces 2 & 3 and service apartments (GDV: RM600mil), and executive apartments at STP1 called The Tamarind (GDV: RM900mil). The en-bloc sales of the remaining 34 units of serviced apartment at Princess House are still under negotiations.

- Unbilled sales stood at RM831mil with property sales of RM250mil, as at end-1HFY15. We have trimmed our estimates by 10% for FY15F to RM132mil.

- The pre-qualification of reclamation contractors will be held in December. The tender is expected to be called in January 2015 and will likely be awarded in March 2015. Reclamation will commence thereafter.

- We think E&O is highly likely to award the tender to a sizeable foreign contractor with strong financial muscle and balance sheet as reclamation will be funded through a banker’s guarantee. This is to ensure smooth execution for the entire reclamation process. We believe E&O is in talks with several parties for land sale. This implies a shorter passage of time to monetise land value.

- Separately, shareholders have approved the bond (MTN of up to RM350mil), bonus (1-for-10), and warrants (1-for-5) issue. This should underpin share price performance from now on as shareholders will be given a free 1-for-5 warrants. The next step is to set the entitlement dates for the warrants and bonus, which will be in January.

- E&O remains as our top BUY. The stock is trading at a steep discount of 46% vis-a-vis its NAV.  

Source: AmeSecurities