We visited Eastern & Oriental’s (E&O) Seri Tanjung Pinang Phase 2A (STP2A) project this week. Overall reclamation work is 73% complete and on track for full completion by end-2019. E&O also completed the private placement of 130.2m shares at RM0.98/share to Tan Sri Wan Azmi Wan Hamzah (TSWA) this week. We cut our core EPS by 3% in FY20-21E and reduce RNAV/share by 8% to RM2.88 to reflect the dilution from the private placement exercise. We believe E&O offers deep value and reiterate our long-term BUY call with reduced TP of RM1.44, based on 50% discount to RNAV.

Some Delays in STP2A Reclamation

The completion of reclamation work for STP2A has been delayed to December 2019 from June 2018 due to complications encountered in undertaking large-scale reclamation projects (253-acre island and 131-acre Gurney Wharf). The 131-acre Gurney Wharf will be handed over to the government on completion. We saw a substantial portion of development land on the island has surfaced during our visit. We gather that non-financial foreign parties, including several from Singapore, are exploring joint venture (JV) opportunities with E&O to develop part of STP2A.

Private Placement Completed

TSWA subscribed for E&O’s private placement of 130.2m new shares for RM127.6m or RM0.98/share, representing a 7% premium to current share price. He used to be a substantial shareholder of E&O before disposing his stake to Sime Darby 6 years ago. His entry as a strategic partner will support E&O’s fund raising efforts to accelerate the development of STP2A.

Minimum Fund Raising Target Likely to be Met

We believe the three substantial shareholders, ie, TSWA, Dato’ Seri Tham Ka Hon and Datuk Tee Eng Ho, which collectively hold a 32.9% stake in E&O, will likely take up their rights entitlement. This should allow E&O to meet its minimum fund-raising target of RM250m and possibly maximum target of RM550m if all shareholders subscribe for their entitlements.

Deep Value

We reduce our RNAV/share to RM2.88 from RM3.12 previously to reflect the dilutive impact of the private placement. Based on the same 50% discount to RNAV, our TP is cut to RM1.44 from RM1.56. We see deep value in the stock as it is currently trading at Price/RNAV of 0.3x.

More Fund Raising

E&O is focusing on the disposal of inventories and non-core assets worth about RM0.5bn and RM0.66m at market value respectively. It is also exploring potential bonds issuance to refinance its term loans with outstanding amount of about RM0.7bn currently and partly finance STP2A infrastructure cost of RM0.4-0.5bn. E&O also plans to complete the perimeter rock bund for STP2B and STP2C, which will cost RM250-300m. RM48m has been spent to date to complete a 1-kilometer stretch.

Source: Affin Hwang Research - 22 Mar 2019