E&O’s CA a step to monetise STP2

Eastern & Oriental Bhd (Jan 22, RM1.43)

Maintain buy with an unchanged fair value of RM2.76: Eastern & Oriental Bhd (E&O) announced on Bursa Malaysia that its subsidiary Tanjung Pinang Development Sdn Bhd had signed a supplementary concession agreement (CA) with the Penang government. This relates to E&O’s concession rights to reclaim 980 acres (396.59ha) of land within Seri Tanjung Pinang (STP).

The key terms of the supplementary CA are as follow: STP2’s concession rights come with 760 acres of reclaimed land, including about 20 acres for the coastal road corridor previously reclaimed and surrendered as per the CA; the reclamation works that commenced in 1997 are to be completed before Dec 31, 2022 in two phases (Phase 1 completed); and E&O is to reclaim a total of 191 acres and subsequently surrender to the Penang government (including 131 acres in Persiaran Gurney).

The agreement marks another step forward for E&O to monetise its highly anticipated STP2 development.

Funding for Phase 2A is already in place; the group successfully secured RM1 billion in syndicated facilities from Maybank Islamic Bank Bhd and RHB Islamic Bank Bhd to partially finance STP2.

According to the local press, mobilisation works and the installation of hoardings could commence by next month ahead of the commencement of reclamation works. Investor attention will refocus on E&O’s ability to secure Level 1 investors for STP2 over the next few months. Such a move will rejuvenate buying interest in the stock, and lead to a rapid narrowing of the steep 75% discount to our fully diluted net asset value. Based on our estimated selling price of RM400 per sq ft, the profit from potential land sales in STP2 may be lucrative because of the low breakeven cost. — AmInvestment Bank, Jan 22

This article first appeared in The Edge Financial Daily, on Jan 26, 2016. Subscribe to The Edge Financial Daily here.