- We reaffirm our BUY rating on Eastern and Oriental Bhd (E&O) with an unchanged fair value of RM4.73/share, based on 50% discount to our NAV of RM9.47/share. Our NAV is based on an assumed land value of RM500psf for Sri Tanjung Pinang 2 (STP2).

- E&O has been granted planning permission by the Penang Local Planning Authority to commence reclamation at STP2.

- Newsflow momentum is picking up; the notice of prequalification of contractors for the reclamation of STP2 has just been issued by E&O – see Exhibit 1. The closing date for the submission of pre-qualification documents by contractors is fixed on 24 December 2014, 12 p.m.

- The key upcoming catalyst for E&O is the award of reclamation tender, which is expected by March 2015. This would set a transparent break-even price for E&O as reclamation costs would be fixed.

- We remain committed to our investment thesis of the significant accretion from STP2, underpinned by the lucrative development – a significant spread between the low breakeven land cost and our assumed land value of RM500psf. We estimate the break-even land cost of RM94psf for gross land (or RM138psf for net land). Furthermore, our NAV is yet to capture the development profits from STP2.

- As mentioned in our earlier report, we opine that E&O is likely to award the reclamation tender to a sizeable foreign contractor with strong financial muscle and balance sheet given that funding for STP2 reclamation will be through banker’s guarantee, similar to STP1.

- Strong financial standing is crucial to ensure smooth execution of the entire reclamation process undertaken by the contractors. Some of the key financial requirements outlined in the notice of pre-qualification include:-1) International/Malaysian marine contractor: Shareholder fund of not less than USD100mil and minimum average annual construction turnover of USD1bil p.a.

2) Malaysian marine contractor participating in a joint venture with an international contractor: minimum average annual construction turnover of RM20mil p.a.

- We attribute the recent share price weakness to order-driven selling. Share price have retraced by 37% from its YTD peak of RM3.18/share in July. The current share price weakness presents a good buying opportunity ahead of E&O monetising land value at STP2, which will narrow the valuation gap. E&O is in talks with several parties for a land sale.

- The stock is trading at a deep discount of 76% to its NAV.

Source: AmeSecurities