E&O to benefit from RPGT exemption in Medini

Eastern & Oriental Bhd
(Jan 6, RM1.91)
Maintain buy at RM1.86 with a fair value of RM3: We reaffirm our “buy” recommendation on E&O with an unchanged fair value of RM3.00 per share, based on a 35% discount to our net asset value (NAV) of RM4.61 per share, including the signification accretion to its asset value from the Seri Tanjung Pinang 2 (STP2) project in Penang. Excluding STP2, our NAV stands at RM1.36 per share.

Based on our channel checks, there are plans to exempt property developments in the Medini zone in Iskandar Malaysia from the real property gains tax (RPGT), given its strategic importance to the overall development of the region in Johor, which is still at the embryonic stage of its life cycle. If this materialises, it will provide a significant boost to E&O’s Avira Wellness development there (with gross dvelopment value of more than RM3 billion).

We believe that Avira should attract positive demand due to the expected strong reception for Phase 1, which comprises landed homes (208 terraced units). This is the first landed residential property development within Medini. Avira’s other landed homes in the pipeline include semi-detached and bungalow units.

Medini also has the ability to draw strong interest from Singaporean investors due to Temasek Holdings Pte Ltd and E&O’s strong branding. Demand will be underpinned by the rising number of Singaporeans relocating to Johor given: (i) the affordable property prices compared to Singapore; and (ii) enhanced connectivity between Johor and Singapore via the Rapid Transit System (completion in 2018).

All in all, the key catalyst to E&O’s share price lies with the regulatory approval for the commencement of the reclamation of STP2 (307.6ha), which is expected to be obtained after the Chinese New Year.

The significant boost from the crystallisation of STP2 will result in a tripling of its NAV. — AmResearch, Jan 6

This article first appeared in The Edge Financial Daily, on January 07, 2014.