E&O’s Seri Tanjung Pinang Phase 2 reclamation project kicks off

Eastern & Oriental Bhd (Oct 29, RM1.60)

Maintain buy with an unchanged target price (TP) of RM2.54: Eastern & Oriental Bhd (E&O) has awarded the reclamation contract for its Seri Tanjung Pinang Phase 2 (STP2) project to the wholly-owned Malaysian subsidiary of China Communications Construction Company Ltd (CCCC) for RM2.32 billion.

Locking in the reclamation cost at about RM110 per sq ft (psf) of net land is attractive compared with the market value of developed land of over RM500 psf. We reiterate our “buy” call on E&O and our TP is based on a 40% discount to revised net asset value (RNAV).

The letter of award to CCCC comprises two packages: award of Package 1 to reclaim Phase 2A, which comprises the 253-acre (102.4ha) STP2 island and the 131-acre extension of Gurney Drive, for approximately RM1.035 billion, and the conditional award of Package 2 to reclaim a 507-acre STP2 island for approximately RM1.285 billion, subject to adjustments arising from fluctuations in exchange rate and fuel price and other costs. Package 1 is scheduled to be completed in 30 months. If CCCC meets the conditions for Package 2 within six months, Package 2 is scheduled to be complete in 48 months.

The award of Package 2 is conditional upon the approvals of the board of directors of E&O’s 78.8%-owned Tanjung Pinang Development Sdn Bhd (TPD) and the relevant regulatory authorities. Approval is dependent on the performance of CCCC to reclaim the land under Package 1 and the board’s acceptance of the final price for Package 2.

We understand that CCCC will hold on to the agreed RM1.285 billion price for Package 2 if the approvals are received within six months. E&O will seek a strategic partner to take a stake of up to 49% in a joint-venture company under TPD for the development of Phase 2A. E&O targets to secure a partner within six months to provide financial support for the project and partially unlock the value of its land reclamation rights.

E&O’s current price to RNAV of 0.4 times is at a sharp discount to the sector average of 0.6 times. The appointment of a reclamation contractor for Phase 2A of its STP2 project would kick-start the project, which contributes 42% of our RNAV per share of RM4.23.

Key risks include slow property sales and the execution risk of the STP2 project. — Affin Hwang Capital, Oct 29

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This article first appeared in The Edge Financial Daily, on Oct 30, 2015. Subscribe to The Edge Financial Daily here.