• Disposing Lone Pine Hotel for RM85m

• Positive on the disposal

• Disposal gain estimated at RM23.3m

• Maintain BUY with unchanged TP of RM2.68

Disposing Lone Pine Hotel for RM85m. Eastern & Oriental Berhad (E&O) announced that it has entered into a share sale agreement with Langkawi Saga Shopping Centre Sdn Bhd and Lubritrade Trading Pte Ltd to dispose Lone Pine Hotel for a total consideration of RM85m. Lone Pine Hotel is located at Batu Feringghi, Penang. The hotel recorded occupancy rates of 65% and 69% for FY15 and FY16 respectively. The proposed disposal is expected to be completed by Oct 2017.

Positive on the disposal. We view the disposal positively as the disposal could help reduce net gearing of E&O to 0.68x from 0.71x as of March 2017. E&O plans to utilize the proceeds for working capital and repayment of borrowings.

Disposal gain estimated at RM23.3m. Loss of earnings contribution from Lone Pine Hotel is expected to be minimal as hospitality division of E&O only contributed 2.8% to total operating profit in FY17. Meanwhile, E&O is expected to realize an estimated disposal gain of RM23.3m from disposal of Lone Pine Hotel. Besides, annual interest saving is estimated at RM4.6m per annum assuming E&O uses the proceeds from disposal entirely to pare down borrowings. We estimate the disposal gain and interest saving would potentially lift FY18 earnings by 24.9%. Nevertheless, we maintain our earnings forecast pending completion of the disposal.

Maintain BUY with unchanged TP of RM2.68. Maintain BUY call on E&O with unchanged TP of RM2.68, based on 55% discount to RNAV. We are positive on the long-term prospect for E&O following the entry of KWAP as strategic investor of STP2A which helps to unlock the value of STP2 project. Besides, the entry of KWAP and the assets monetization of E&O would help to keep net gearing of E&O in check.

Source: MIDF Research - 19 Jun 2017