Eastern & Oriental; Hold; RM1.42
Price Target: RM1.80; EAST MK
First venture abroad

E&O has acquired Princes House, a freehold office cum retail building in Central London for GBP20.3m (RM99.6m) – based on Jones Lang LaSalle’s appraised value. The prime property is located along Kingsway in the Borough of Westminster, close to Covent Garden, Royal Opera House, West End famous theatres and The Savoy iconic hotel.

The property is only 10% tenanted by local retailer Paul Smith (GBP133k p.a. up to Oct 2017) as office tenants have shifted out previously following an asset foreclosure exercise. E&O intends to either:

1. Renovate & lease remaining office space: With total NLA of 46,087sf, rental income could touch GBP1.3m p.a. (RM6.5m) or 6.5% yield. But demand for office space within Central London remains soft as tenants prefer Canary Wharf due to cheaper rents & incentives;
2. Renovate and develop into a residential block (conversion from commercial title will unlikely be an issue). Assuming GBP200psf refurbishment cost and GBP1500psf ASP, GDV works out to GBP69m (RM341m) while potential earnings GBP8.8m or RM43.5m over 2-3 years (10-14% of FY14 earnings, based on 17% PBT margin).

E&O has been intending to set up a London office to market its products and explore opportunities in UK (Chairman Datuk Terry Tham is mainly based in London). While we are a bit apprehensive of its overseas ambition and prefer funds to be used for landbanking locally, impact to balance sheet will be small - assuming 2/3 debt financing, net gearing will only increase to 27% from 3QFY12’s 22%.

Maintain Hold and TP of RM1.80 (based on 40% discount to RNAV of RM3.05).

Source: HwangDBS Research - 24 April 2012