- 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 announced that the exercise price for the warrants have been fixed at RM2.60/share. As part of its corporate exercise, E&O had earlier announced a 1-for-5 free warrants and a 1-for-10 bonus issue together with a bond issue (mediumterm loan of up to RM350mil).
- The entitlement dates for the warrants and bonus are yet to be determined, but are likely to be held towards end of January.
- Our check with management indicates that the timeline to commence reclamation is well on track; the award of reclamation tender is expected by March 2015. The open tender for reclamation works on STP2 will be called this month.
- This is viewed as a key catalyst for E&O given that reclamation costs would be fixed and will set a transparent break-even price for E&O, underpinned by STP2’s lucrative development. On our estimates, the break-even land cost is estimated at RM94psf for gross land (or RM138psf for net land).
- We believe that the current share price weakness represents a good buying opportunity for E&O. Given the current weak sentiment on property stocks, the litmus test for E&O is to crystallise land value in STP2 to establish benchmark prices. This, we think would significantly generate a renewed buying interest on the stock.
- E&O remains as our top BUY. The stock is trading at a steep discount of 77% visa-vis its NAV, which is unjustified, given the significant accretion to its NAV from the reclamation of STP2.
Source: AmeSecurities
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