Highlights

We met with the management of E&O and came away feeling upbeat about its four engines of growth:

Engine #1: Penang. To recap, E&O is targeting to arrange the public forum for the Seri Tanjung Pinang 2 (STP 2) land reclamation soon and begin land reclamation works by FY15, using the sand method which would be much faster than the soil method used in Singapore in the past. Therefore, E&O would be aiming for an official launch by FY17, and the indicative GDV stands at RM3.0bn for now. In the meantime, the focus is to complete the launches of the STP 1 developments.

Growth Engine #2: Iskandar. This collaboration between Khazanah and Temasek will comprise landed and high-rise residential properties, to be complemented by the Wellness Sanctuary / Resort as the key attraction, and will be progressively launched over 2013 – 2019. Phase 1 is due to launch by 4Q 2013, and we understand that demand was so strong that E&O actually ramped up production from the initial 90 units to the current 200 units for Phase 1.

Growth Engine #3: Greater KL. In our view, E&O is somewhat lacking in terms of landbank in Greater KL (GKL), will have only three launches over the next three years, namely The Mews at Jalan Yap Kwan Seng, The Peak and Jalan Conlay. After three years’ time, Kemensah Heights (310 acres, RM1.5 to 2.0bn GDV) will commence development.

Growth Engine #4: International. Currently E&O is focused on taking over small commercial developments in London and refurbishing them into serviced apartments, which we believe will provide good overseas exposure to its E&O Residences concept. New KPIs. Mainly growth oriented: (1) RM1.5bn annual launch target from FY 14-16; (2) RM3.0bn annual launch target from FY17 onwards; and (3) Cumulative net profit of RM450-500m from FY14-15.

Risks

Slowdown in global / regional economy will hurt sales in the premium segment.

Forecasts

We project robust earnings growth of 20-25% for FY15-16, given the bulk of its projects will come onstream. We believe its KPI of 3-year cumulative net profit of RM500m is achievable.

Rating

N/A

Positives: Niche luxury developer.

Negatives: Lack of landbank in Greater KL.

Valuation

Our RNAV is RM3.90 and our TP is RM2.73 (30% discount to RNAV).

Source: Hong Leong Investment Bank Research - 9 Oct 2013