CIMB Research Report: Eastern & Oriental Bhd - Top pick for liquidity and beta

Upgrading all developers

In view of our increasingly bullish stance on the property sector and our upgrade of the sector from Trading Buy to Overweight, we are also upgrading all developers including E&O from Trading Buy to OUTPERFORM. Potential share price triggers for E&O include 1) favourable newsflow from the launch of more than RM4bn worth of properties over the next 2-4 years, and 2) newsflow from potential joint ventures that will help unlock the hidden value of the group. E&O remains the most liquid and highest beta property stock under our coverage and is our top pick in the property sector. We raise our FY10 net profit forecast by 45% as we factor in RM31m gains on the recent sale of Lot 595. Our target price rises marginally from RM1.89 to RM1.90, still based on a 30% discount to its fully diluted RNAV.

Upgrading property sector

Despite all the problems faced by the sector including squeezed margins, poor sales for most developers, rising unemployment and the economic recession, the property sector was one of the best performing sectors last year. This was because property stocks came from a very low base, having been bashed down in 2008. Share prices also enjoyed a big rebound because the sector is considered to be cyclical and highbeta, and would benefit from the rebound of the stock market and economy. The sector, however, was dealt a temporary blow at end-Oct when the government announced a 5% RPGT that took effect on 1 Jan 2010.

Property stocks reacted negatively to the RPGT announcement and have been languishing since then. While we were also shocked by the move, we believe that the market has overreacted. Fundamentals are looking up as 1) the economy is forecast to return to growth in 4Q09 after being mired in recession in 1Q-3Q09, 2) the stock market’s spectacular 40%+ rebound in 2009 will help strengthen confidence and sentiment on properties, and 3) affordability of properties is near its all-time best and the low interest rate regime will encourage property purchases, especially with inflation preying on some consumers’ minds.

Valuation and recommendation

2009 was a difficult year for E&O, particularly for its share price. However, the group appears to have rebounded with 1HFY3/10 earnings returning to the black. The 1-for-2 rights issue and asset disposal exercise have shored up its balance sheet significantly and the group is well positioned to benefit from an uptick in the property sector. We raise our FY10 net profit forecast by 45% as we factor in RM31m gains on the recent sale of Lot 595. Its fully diluted RNAV goes up slightly from RM2.71 to RM2.72, raising our target price marginally from RM1.89 to RM1.90 as we continue to tag a 30% RNAV discount to the stock. The stock is upgraded from Trading Buy to OUTPERFORM as it remains the most liquid and highest beta property stock under our coverage. E&O continues to be our top pick in the property sector. Potential rerating catalysts include 1) favourable newsflow from the launch of more than RM4bn worth of properties over the next 2-4 years, and 2) newsflow from potential joint ventures that will help unlock the hidden value of the group.