• Datuk Tee Eng Ho and family (TEH) has acquired an additional 10.9% stake in E&O from Sime Darby for RM0.60 per share
• TEH is extending a conditional mandatory take-over offer (TO) for the remainder 57.3% of the issued shares, which are not held by TEH and persons acting in concert with them (PACs) at RM0.60 per share
• We recommend accepting the TO following the strong outperformance of the share price as prospects for E&O remains challenging. We lift our TP to the TO price of RM0.60, which implies a 73% discount to RNAV

Reasonable TO Price

We believe the TO price of RM0.60 is reasonable given the high implied FY22E PER of 28x and challenging prospects for E&O as border closures remain, which affects the sales of its high-end residential projects. However, the TO price is at a Price/Book of 0.5x and Price/RNAV of 0.3x. Despite the deep value in E&O at the TO price, its assets, such as the Seri Tanjung Pinang Phase 2A (STP2A) land, will only be monetised over the long term through the development of its land bank.

TO Conditional Upon Acquiring More Than 50% Controlling Stake

TEH and the PACs have an effective 42.7% stake in E&O post-acquisition of Sime Darby’s 10.9% stake. The TO offer is conditional upon TEH and the PACs acquiring more than 50% controlling stake in E&O. We believe the chances of them succeeding in acquiring more than 50% stake is high. Substantial shareholders such as Urusharta Jamaah (6.6% stake) and GK Goh (5.9% stake) have been trimming their stakes and we suspect that they may accept the TO offer.

No Change in Management Expected

We understand that the management of the company is unlikely to change with TEH acquiring a majority stake as he has been working closely with Executive Deputy Chairman Dato’ Seri Terry Tham Ka Hon, who is also one of the PACs. We believe the TO will consolidate their joint control of E&O and ensure the continuity in its future development plans. Major changes in shareholding of substantial shareholders in 2014-2021 have seen a declining acquisition price trend (Fig 2).

Maintain Our HOLD Call

We recommend accepting the offer as E&O is the best performing property stock YTD in our coverage despite the weak 3QFY21 results. We reiterate our HOLD call with a lifted TP of RM0.60, based on 73% discount to RNAV. Key upside/downside risks are recovery/weakness in demand for luxury homes.

Source: Affin Hwang Research - 29 Mar 2021