E&O’s  masterplan  for  STP2  was  endorsed  by  the  Penang  state government yesterday. After this, the tender for reclamation is expected to  be  out  in  late  3Q,  and  works  could  kick  off  in  4Q.  We  believe  the market  has  not  fully  priced  in  the  land  value  of  STP2,  and  this announcement should  be a boost  to  its  share price. Our assumption of MYR400 psf still suggests further upside to RNAV. Maintain BUY.

• Endorsement is in hand.  Soon after the 9.9%  share acquisition by its MD Dato’ Terry Tham on 28 May, Eastern & Oriental (E&O) received the endorsement  from  the  Penang  state  government  for  its  Seri  Tanjung Pinang 2 (STP2) masterplan. We are not surprised with the news, as this came in line with its guidance. We also said in our 3 June report “Further Catalysts  For  Share  Price”  that  the  state  should  draw  greater  comfort after Dato’ Terry Tham raised his stake to 15% recently.
• Tender  for  reclamation  in  late  3Q,  works  to  start  in  4Q.  After  the endorsement,  the tender  for the reclamation  project  should come in late 3Q,  and  works  could  begin  in  4Q.  Currently,  E&O  is  working  on  an environmental  management  plan  (EMP)  for  the  entire  891  acres,according  to  the  guidelines  specified  in  the  detailed  environmental impact  assessment  (DEIA)  report  approved  by  the  Department  of Environment  (DOE).  The state’s approval  still  needs to be obtained for the EMP to ensure that  the plan  conforms to the technical  requirements, before being incorporated into the  tender document.  We do not foresee any hiccups, as this is just part of a procedure.
• Promising upside to RNAV.  We believe the market has not fully priced in  the  land  value  of  STP2  (with  MYR25bn  GDV),  even  after  approval from the DOE in April and the positive signals that Dato’ Terry Tham sentout through his share purchase at MYR2.90/share two weeks ago. At our land  value  assumption  of  MYR400  psf,  STP2   alone  makes  up  51%  of our estimated RNAV/share of MYR4.70. The stock is currently trading at a steep 43% discount to RNAV. We still see further upside to our RNAV, especially  when  the  reclamation  works  progress  along,  benchmarked along  with  the  transacted  price  of  MYR1,002  psf  for  the  1.1-acre  Eco Macalister land in Georgetown that will be injected into Eco World (ECW MK, NR).
• Maintain BUY. The catalyst to its share price has occurred. We maintain our BUY rating and MYR3.52 FV, based on a 25% discount to RNAV.

Source: RHB