• BUY, TP rises to MYR0.88 from MYR0.55, 36% upside. Eastern & Oriental (E&O), a proxy for a Penang Island property play, should benefit from the upcoming easing of Malaysia My Second Home (MM2H) requirements, as well as the development of the light rail transit (LRT) line to Tanjung Bungah. Its fundamentals and earnings prospects have also improved, especially after new major shareholder Datuk Tee Eng Ho took over the company in 2021. Our TP is in line with the recent sector re-rating.

• Friendlier MM2H guidelines to spur real estate purchases by foreigners. The upcoming relaxation of MM2H requirements is expected to benefit areas that are typically favourite spots for foreign property buyers. These include Penang Island, Kuala Lumpur’s KLCC and Mont’ Kiara areas, and Iskandar Malaysia in Johor. E&O, as the proxy for a Penang Island property play, is set to benefit from this new measure, which was announced last week. In the past, about 20% of E&O’s buyers were foreigners.

• Extension of LRT line to Tanjung Bungah to benefit Andaman Island. The Bayan Lepas LRT line, originally planned to connect Penang International Airport to Komtar, will now be extended all the way to Tanjung Bungah. As the final Tanjung Bungah station (tentative site) is only about 2.5 km away from Andaman Island (via the Gurney bridge which is currently under construction), we think this new transport infrastructure will likely spur investment opportunities of E&O’s projects going forward. Already, E&O’s first service apartment tower, The Meg at Andaman Island, was fully sold in the mid-year. The second block, Arica, is now 85% sold. Management was able to raise its ASP from MYR900psf for The Meg to MYR1,000psf for Arica. In the pipeline, some landed properties and another condominium project (with larger unit sizes) at Andaman Island will be launched in 4QFY24 (Mar). Both have a combined GDV of about MYR800m.

• Successful turnaround in earnings and balance sheet. Since the change in its major shareholder in 2021, E&O’s fundamentals have strengthened significantly. Various cost-saving measures have been implemented, including streamlining human resources, renegotiating borrowing terms, and improving operational efficiencies. The company’s quarterly earnings started seeing a gradual turnaround from 1QFY23 (although 4QFY23 earnings were dampened by a write-down on its UK assets). Net gearing has also eased to 0.46x from the peak of 0.6x last year.

• Earnings visibility backed by strong unbilled sales. Given the successful launches at Andaman Island, E&O’s unbilled sales hit a high of MYR999.3m as at 1QFY24. In line with the sector re-rating, we now value E&O at a 60% discount to RNAV (from 75%), with 2% ESG discount imputed – in line with levels during the initial stage of the 2011 upcycle.

Source: RHB Securities Research - 16 Oct 2023