Mega project: A bird’s eye view of E&O’s Seri Tanjung Pinang development.
THE entry of the Retirement Fund Inc (KWAP) as strategic partner into the flagship project of Eastern & Oriental Bhd (E&O) in Penang has given the property developer the much needed dose of confidence from the market.
Because of the funding required for its reclamation works at the seafront in Penang for the Seri Tanjung Pinang (STP) project, E&O has for some time now underperformed the market.
Market observers say that E&O has been on a lookout for a strategic partner to take part in the second phase of its STP project as the reclamation works could require some RM4bil.
“The entrance of KWAP has certainly enhanced investors’ confidence in E&O and its ability to complete its STP project,” says a fund manager.
Despite the renewed confidence, analysts are valuing E&O at a steep discount of its revised net asset value (RNAV) per share of between 50% and 70% due to what they deem as the long gestation period of the STP project.
RNAV is a common valuation method used to determine the net asset value of a property development company.
The total area to be reclaimed under STP project is 980 acres. So far, E&O has been funding the reclamation works mainly from borrowings. Phase one of the STP township development comprises 240 acres and is almost completed.
The second phase of the STP project involves 740 acres. In 2015, E&O had secured RM1.1bil in financing facilities to part-finance the reclamation and infrastructure works for a portion of the second phase of STP, dubbed STP 2A.
According to Affin Hwang Investment Bank senior analyst Loong Chee Wei, the reclamation and infrastructure costs for the whole second phase of STP project is about RM4bil.
“For STP 2A portion, the reclamation and infrastructure cost is about RM1.8bil. Having KWAP as partner, E&O has all the financing to complete the reclaimation works for STP 2A without raising additional funds,” he tells StarBizWeek.
Under the partnership, KWAP will take up a 20% stake in STP 2A and subscribe to a 5.26% stake in the listed entity.
The whole deal is estimated to be worth at least RM887.7mil.
KWAP’s 20% equity interest effectively translates to 33 acres or about RM530 per sq ft. The transaction values the entire phase 2A of the STP project at RM3.83bil. E&O estimates that STP 2A would have a gross development value of RM17bil.
E&O is also planning to utilise the proceeds from KWAP’s entry for working capital and repayment of borrowings.
Analysts have turned bullish on E&O following the entry of KWAP.
Loong of Affin Hwang says that it would enhance E&O’s chances of securing another potential partner for the STP project, especially on the commercial development portion of the project.
“The entry of KWAP is a vote of confidence for the STP project and will encourage other potential partners to buy a stake in the project,” he says in a report.
Loong says the land sale will boost E&O’s earnings for this year and next year by 24%-53% and pare down the firm gearing level.
Presently, E&O’s net gearing stood at 0.78 times and is expected to reduce to 0.41 times upon completion of the exercise with KWAP.
Apart from taking a direct stake in the project, KWAP will also subscribe to 66.1 million new shares in E&O. The price of the shares to be transacted is between RM1.84 and RM1.94 each, costing KWAP at least RM121.6mil.
The transaction gives KWAP an additional 5.26% equity stake in E&O, rasing it to 6.75%.
The other notable investors in E&O are the Employees Provident Fund and Lembaga Tabung Haji, with 5.6% and 6.6% stakes, respectively.
The STP township project is a seafront development situated along Penang’s north-east coast, which is located at Tanjong Tokong.
The project was approved by the state government back in 1992.
The reclamation on phase 2A of the STP project has already started, with dredging works after all the necessary approvals were obtained.
Approximately 34% of STP 2A has been reclaimed, and E&O is targeting to complete it by the second half of 2018.
Analysts mixed in views
Last year, E&O received an extension of three years up to 2022 to reclaim the remaining portions of 760 acres of STP2.
Aside from the reclamation of 760 acres under the project’s concession agreement, which is slated to be completed by June 2018, E&O is reclaiming a further 131 acres at its own cost along the Gurney Drive foreshore for the Penang state government.
The Gurney Drive area is next to Tanjong Tokong and is a popular spot for locals and tourists.
Shares in E&O were halted from trading on Thursday and resumed trading yesterday. Before the announcement on KWAP participations in E&O’s project, it traded at RM2.12 on Wednesday – its highest level in two years. It consolidated and closed at RM1.93 after the announcement.
E&O’s quarterly earnings has been on a roller coaster ride since the second half of financial year ended June 30, 2015 (FY15), amid soft property market. The property developer recorded a net loss in the fourth quarter of FY15.
Nonetheless, in the third quarter ended Dec 31, 2016, E&O saw a significant jump in its net profit to RM31mil from RM3.8mil a year earlier.
Loong has raised its RNAV per share on E&O to RM6.10 and valuing its share price at 50% discount of the RNAV.
However, CIMB Research reckons that STP 2 would take a long time to unlock, spanning over 30-45 years.
“We believe E&O valuation is rich. We still value the stock based on a steep 70% discount to RNAV as we believe the value of STP2 will take a long time to unlock,” it says.
Nonetheless, CIMB Research estimates that E&O earnings will grow at least by 55% to reflect the earnings contribution from the land sale.
It should be noted that the last transaction of a block of E&O shares was in September last year when its deputy chairman Datuk Seri Terry Tham forked out RM323mil or RM2.45 per share for a 10% stake in the company. He bought the stake from Sime Darby Bhd and it was almost 60% premium to the market at that time.
This was the second tranche of shares Tham bought back from Sime, having paid RM319mil for 9.9% or 110 million shares at RM2.90 per share in 2014.
Following these transactions, Tham has a 21% interest in E&O while Sime was left with a 12.2% stake.
E&O has been trading well below the price that was transacted due to the overhang of financing issues with regards to the phase two of the STP project. Now that the financing is in place with the entry of KWAP, the company needs to perform for the valuations to live up to its billings.
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