Eastern & Oriental Bhd
(March 22, 91 sen)
Maintain buy with a target price (TP) of RM1.44: The completion of reclamation work for Seri Tanjung Pinang phase 2A (STP2A) has been delayed to December 2019 from June 2018 due to complications in undertaking large-scale reclamation projects — a 253-acre (102.39ha) island and the 131-acre Gurney Wharf. The Gurney Wharf will be handed to the government upon its completion. During our visit, we saw a substantial portion of development land has surfaced on the island. We gathered that non-financial foreign parties, including several from Singapore, are exploring joint-venture (JV) opportunities with Eastern & Oriental Bhd (E&O) to develop part of the STP2A.

Tan Sri Wan Azmi Wan Hamzah has subscribed for E&O’s private placement of 130.2 million new shares for RM127.6 million or 98 sen per share — a 7% premium to the current share price. He was a substantial shareholder of E&O before disposing of his stake to Sime Darby Bhd six years ago. His entry as a strategic partner will support E&O’s efforts in raising funds to accelerate the STP2A development.

We believe the substantial shareholders — Wan Azmi, Datuk Seri Tham Ka Hon and Datuk Tee Eng Ho, collectively holding a 32.9% stake in E&O — will likely take up their rights entitlement. This should allow the E&O to meet its minimum target of raising RM250 million and possibly the maximum target of RM550 million if all shareholders subscribe for their entitlements. We have reduced our revalued net asset valuation (RNAV) per share to RM2.88 from RM3.12 previously to reflect the dilutive impact of the private placement. Based on the same 50% discount to RNAV, our TP is cut to RM1.44 from RM1.56. We see a deep value in the stock as it is currently trading at price/RNAV of 0.3 times.

E&O is focusing on the disposal of inventories and non-core assets worth about RM500 million and RM660,000 at market value respectively. It is also exploring a potential bond issuance to refinance its term loans with an outstanding amount of about RM700 million currently, and to partly finance the STP2A infrastructure cost of RM400 million to RM500 million. E&O also plans to complete the perimeter rock bund for STP2B and STP2C, costing RM250 million to RM300 million. To date, RM48 million has been spent to complete a one-km stretch. — Affin Hwang Capital, March 22