Eastern & Oriental Bhd (Oct 20, RM1.62)

Fully valued with an unchanged target price of RM1.20: Given its niche focus as a high-end property developer, Eastern & Oriental Bhd’s (E&O) property sales may suffer from a weak sentiment in this segment of the market due to affordability issues.

E&O is expected to announce soon the appointment of its Seri Tanjung Pinang phase two (STP2) reclamation contractor involving 384 acres (155.4ha) of reclamation (including 131 acres of the Gurney Drive foreshore for state government) though it has been delayed for a year.

The reclamation cost may be lower than initial estimates given the weak crude oil price.

The listing of its United Kingdom (UK) property arm on the Alternative Investment Market of the London Stock Exchange will raise at least £36 million (RM238 million).

E&O will then end up with a 30% stake in the UK entity. The entry into the UK market via a listed entity is long-term positive for E&O, but demand could be dented by the escalating London property prices.

The yet-to-be reclaimed STP2 with 253 acres accounts for 47% of our revalued net asset valuation which will require a long gestation period.

The management is sticking to its three-year cumulative profit target of RM450 million over financial year 2014 (FY14) to FY16, but the weaker sentiment could make it very challenging. 

Also, consensus’ earnings are substantially higher than our forecast, which we believe is unjustified. — AllianceDBS Research, Oct 20.

This article first appeared in The Edge Financial Daily, on Oct 21, 2015.

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