- We reaffirm our BUY recommendation on Eastern & Oriental (E&O) with an unchanged fully-diluted fair value of RM3.82/share, based on a 50% discount to our fully-diluted NAV of RM7.65/share. We have imputed a land value of RM500psf for its soon-to-be reclaimed Seri Tanjung Pinang 2 (STP2), which accounts for a significant 84% of our GAV.

- E&O reported weak set of results with a net profit of only RM11mil for 3QFY15, taking cumulative net profit to RM51mil for the first nine months of the fiscal year. This makes up 34% of our previous and 41% of consensus full-year estimates.

- We have trimmed our net profit estimate for FY15F by 21% to RM108mil even after taking into account a significantly stronger 4QFY15F.

- 4QFY15F’s net profit will be boosted by the completion of two condominiums blocks in the Andaman series (Block 1F and 1H) coupled with acceleration in progress billings from Phase 1 of Avira terraces in Iskandar. Further upside to earnings may come from the bookings of the successful pre-sales of The Tamarind in STP1. For comparison, E&O reported a net profit of RM51m in 4QFY14.

- The Tamarind had enjoyed a good take-up rate (Phase 1: 90% of 552 units) since its launch on March 21. We believe this is due to its strategic location and attractive pricing (average selling price of RM730psf) where 80% of the units are below RM1mil.

- At this juncture, we are not worried about its somewhat patchy earnings delivery and overseas foray in London. Our thesis continues to centre on E&O unleashing the deeply embedded value of STP2, as it monetises the land after the award of the reclamation contract. To recap, our estimated break-even cost for STP2 is about RM2.8bil, or RM94psf on gross land area versus our estimated land value of RM500psf.

- The coming weeks will be pivotal for E&O. The shortlisted consortium of contractors will be putting in tender bids for the reclamation of STP2 by March. E&O is expected to award the reclamation job and commence reclamation works by July.

- The stock is currently trading at a steep discount of 71% vis-à-vis its NAV. Our BUY conviction is premised on the highly coveted STP2 and significant accretion to NAV.

Source: AmeSecurities