E&O issued a letter of award to a Chinese company for its land reclamation. As the reclamation cost is below our estimate, we raise ourTP to MYR1.80 (15% upside) and upgrade the stock to a TRADING BUY. Management indicated that the reclamation cost will be funded entirely via several tranches of term loan. The next step is to look for a longterm strategic partner to invest a stake in STP2.

Reclamation contract is awarded. Eastern & Oriental (E&O)announced that it has awarded the Seri Tanjung Pinang 2 (STP2) reclamation job to China Communications Construction Company Limited (CCCC). The works involve the reclamation of Phase 2A with an area of 384 acres (including the 131-acre Gurney Drive foreshore), at a contract sum of MYR1.035bn. The reclamation is to be completed within 30 months. According to management, E&O will fund the entire Phase 2A reclamation via several tranches of term loan.

Lower oil price brings down reclamation cost. CCCC has experience in land reclamation and had also helped to complete the construction ofPenang Second Bridge. E&O has benefitted from the current low crude oil prices, which help to reduce reclamation costs substantially.Depending on the quality of Phase 2A reclamation, E&O has a conditional award for the remainder of STP2 (Phase 2B and 2C) covering 507 acres at a contract sum of MYR1.285bn. Given the contract value for both packages, the reclamation costs for Package 1 and 2 areMYR62 psf and MYR58 psf respectively. These are below our earlier estimate.

Upgrade to TRADING BUY. This reclamation award should be positive to E&O’s share price over the short term. As the reclamation cost is below our earlier expectation, after we adjust our RNAV estimate, our TP is raised to MYR1.80 (from MYR1.61), based on an unchanged 60% discount to RNAV. We upgrade the stock to TRADING BUY (from Neutral).