While E&O’s new purchase in London should bring in higherdevelopment GDV, we are cautious on the overall funding commitment for this acquisition as well as the reclamation for Seri Tanjung Pinang 2,which is due to start in 2Q15. Maintain NEUTRAL with a revised TP ofMYR2.12 (6% downside vs ex-bonus price). Post-acquisition, we expect E&O’s net gearing to rise to about 0.5x from 0.31x as at 2QFY15. 

Another project in London. Eastern & Oriental (E&O) announced its proposed acquisition of two multi-storey office buildings located on a site of 1.2 acres in London at a purchase consideration of GBP57m (or MYR308.9m). 

Further diversification. According to the announcement, the potential redevelopment of the two connected buildings could be worth GBP129m based on a total net internal area of 135,000 sqf (about GBP952 psf). Hence, this suggests that the acquisition cost is about 44% of GDV, slightly higher than the previous acquisition of Esca House (about 34%), but we think there could still be some upside potential to the ASP and hence GDV. Nevertheless, given the challenging market conditions locally, we think it makes sense for the local developers to diversify out of Malaysia. 

Funding is crucial. While this new London project will bring in higher development GDV to E&O’s portfolio, we are cautious on the funding commitment. The balance of the acquisition cost (85%) will be payable to the vendor on 13 Mar, being the completion of the proposed acquisition.E&O indicates that 70% of the purchase consideration will be funded via bank borrowings. Hence, given the additional MYR216.3m new debt, we estimate that E&O’s net gearing will rise to about 0.5x. 

Earnings forecasts. We maintain our earnings projections as this redevelopment project may start only in FY17, as design and conceptual works as well as obtaining the planning permission could take up to one year. Interest expense and rental income from one of the buildings should roughly offset each other. 

Maintain NEUTRAL.The ex-date (20 Jan) for the 1-for-10 bonus issue may have contributed to the recent strength in share price. Given the incremental RNAV and the adjustment for bonus issue, our TP is revised to MYR2.12 (from MYR2.27 prior to ex-date), based on an unchanged 50% discount to RNAV. Maintain NEUTRAL.

Source: RHB