• Secured strategic investor for STP2A

• STP2A land valued at RM530psf

• Positive on the exercises as net gearing will be reduced

• Upgrade to BUY with TP of RM2.68

Secured strategic investor for STP2A. Eastern & Oriental Berhad (E&O) announced that it has secured Kumpulan Wang Persaraan (Diperbadankan) (KWAP) as the level 1 strategic investor for Seri Tanjung Pinang (STP) 2A project. A special purpose vehicle (SPV) will be established to undertake the development and sale of the STP2A development land where KWAP will be taking 20% equity stake for RM766m while E&O will hold the remaining 80% stake. Separately, E&O proposed to issue 66.1m shares to KWAP, representing 5.3% of E&O existing number of enlarged share capital, at an issue price within the range of RM1.84-RM2.04.

STP2A land valued at RM530psf. The 20% equity stake disposal to KWAP is equivalent to the value of 8 plots of land in STP2A with total land size of 1.45m sf that will be disposed to KWAP, valuing STP2A land at RM530psf. The transacted price of RM530psf is a positive surprise, higher than our previous land value assumption of RM400psf. We believe value of reclaimed land in STP2A will be crystalized with the entry of KWAP as it provides higher valuation benchmark for the whole STP2 project with total reclaimed land to be 760 acres.

Positive on the exercises as net gearing will be reduced. We are positive on the monetisation of STP2A land and the placement exercise as it will improve balance sheet of E&O. Post shares placement (assuming placement price at RM1.90) and receiving the 10% of disposal consideration, net gearing of E&O is estimated to fall to 0.57x from high net gearing of 0.74x as at end 3QFY17. FY17 and FY18 earnings estimate are unchanged as first launch of property projects in STP2A will only take place in 2H19.

Upgrade to BUY with TP of RM2.68. We upgrade E&O to BUY from Neutral with a higher TP of RM2.68 after revising higher value for STP2 project in our RNAV valuation. We have reduced our RNAV discount to 55% from 60% previously as we anticipate improving balance sheet of E&O. We are turning positive on E&O as the entry of KWAP as strategic investor of STP2A unlocks the value of STP2 project and further ensure the execution of STP2A which is an all-important project to E&O.

Source: MIDF Research - 31 Mar 2017