Eastern & Oriental (E&O) proposed a private placement of new shares of up to 10% of existing share capital and rights issue of shares with warrants. The purpose of the equity issuance to raise RM250-550m is mainly to reduce borrowings and finance its property development projects. We believe the overhang from the equity issuance will dampen sentiment on the stock in the short to medium term. But the long-term prospects for E&O remains good with the scheduled completion of 253-acre Seri Tanjung Pinang Phase 2A (STP2A) by September 2019. Maintain BUY.

Equity Issuance

E&O proposed the private placement and rights issue to raise minimum gross proceeds of RM250m in the minimum scenario and RM550m in the maximum scenario. The rights issue allocation basis and issue prices of the private placement and rights issue will be determined closer to the planned completion of the corporate exercises by 1Q19 and 3Q19 respectively. We gather that the entrepreneurs and substantial shareholders Dato’ Seri Tham Ka Hon (owns 20.6% stake) and Datuk Tee Eng Ho/Tee Eng Seng (owns 15.2% stake) will likely undertake to subscribe for their rights issue entitlement. This will show the entrepreneurs commitment and shore up support for the proposed equity issuances.

Reduce Gearing

According to the announcement, the corporate exercise will reduce its net gearing of 0.61x as at end-FY18 to 0.42x in the minimum scenario and 0.24x in the maximum scenario (before exercise of warrants to be issued) based the indicative issue prices for the private placement at RM1.12 and the rights issue at RM1.20. The indicative rights issue basis is 1 rights share for every 4 existing shares held with 2 free warrants to be issued for every 2 rights shares subscribed. The equity issuances will support E&O’s plan to launch new projects this year while keeping its gearing at a manageable level.

Good Long-term Prospects

Given the good long-term prospects and current deep value, we reiterate our BUY call with RM1.55 target price on a cum basis, based on 50% discount to RNAV of RM3.11. Key risk to our call is the weak take up for the rights issuance and private placement, and prolonged weak property market conditions.

Source: Affin Hwang Research - 12 Feb 2019