Eastern & Oriental Berhad - I3investor

KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

21 March 2012 | Initiating Coverage

Eastern & Oriental Berhad Recommend NEUTRAL

Promising long term growth prospect Target Price (TP): RM1.70

A. INVESTMENT HIGHLIGHTS

• Streamed line group structure: In the past 5 years, Eastern &

Oriental (E&O) had went through a series of divestment and merger

exercises to streamline the group into a single listed platform. E&O

disposed its 50.6% owned construction company, Putrajaya

Perdana Bhd, in 2007 and privatized 63% owned subsidiary, E&O

Property Development Bhd in 2008. The streamlined E&O mainly

comprises of 3 business division which is property development,

hospitality and property investment. The group is well-known for the

iconic E&O Hotel which has a rich history of 127 years.

Nevertheless, property development is the primarily business which

had consistently contributed more than 80% to the top line.

• Niche and premium developer: Among the developers in

Malaysia’s property landscape, township developers like SP Setia

and IJM has vast land banks in sub-urban area while plantation

developers like Sime Darby (Sime) and IOI inherent vast land banks

from the plantation business. In order to avoid direct competition

with the larger size developers, E&O had positioned itself as a

premium & niche player by leveraging on its strong brand name and

expertise in high end development. Some of the notable projects

completed by E&O includes DUA Residency (RM520m GDV luxury

condominium at Jalan Tun Razak), Seventy Damansara (RM70m

GDV Bungalows at Damansara Heights), and Idamansara

(Damansara Heights). Their flagship project was the Seri Tanjung

Pinang Phase 1(STP1) and phase 2(STP2)

• The Crisis Period: 2008-2009 was a challenging period for E&O as

the group had hold back some of their launches during the sub-

prime mortgage crisis. Resulting from the holdback of launches,

earnings was lumpy from FY09 to FY11. Nevertheless, in the same

period E&O embarked on their strategy to strengthen balance sheet

by increasing cash flow and lowering their gearing. Through the

disposal of stocks, non strategic land banks as well as RM236m

right issue of Irredeemable Convertible Secured Loan Stocks at

RM0.65 each, E&O had managed to raise RM481m. Hence, gearing

had improved from 0.8x in FY09 to 0.36X in FY10.

RETURN STATS

Price (20 Mar 12) 1.59

Target Price 1.70

Expected Share Price Return

+6.41%

Expected Dividend Yield +1.60%

Expected Total Return +8.01%

STOCK INFO

KLCI 1577.62

Bursa / Bloomberg 3417/

EAST MK

Board / Sector Main/ Property

Syariah Compliant Yes

Issued shares (mil) 1133.40

Par Value (RM) 1.00

Market cap. (RM’m) 1802.10

Price over NA 1.41x

52-wk price Range RM1.16–RM1.81

Beta (against KLCI) 1.20

3-mth Avg Daily Vol 4.48m

3-mth Avg Daily Value RM7.12m

Major Shareholders

Sime Darby 29.83%

Grand Mission Int Ltd 6.97%

ECM Libra 5.22%

KDN: PP 10744/06/2012

MIDF EQUITY BEAT Wednesday, 21 March 2012

2

• E&O had drawn up a 2 years’ 5 pronged strategies to achieve their “corporate and brand evolution goal’:

� Regional and international exposure of the brand within the group

� Strategic alliances and collaboration with well renowned & international institutions

� Development of new growth engines

� Significant bottom-line growth and sustainable profits

� A.R.M. Talent - to attract the best talents, retain and motivate existing top performers.

In June 2011, E&O has teamed up with Japan's Mitsui Fudosan Co Ltd to market E&O's properties to its high net

worth clients in Japan. Mitsui's will focus on marketing St Mary Residences in Kuala Lumpur and the Quayside

Seafront Condominiums in Penang. In June 2011 E&O entered into a Joint Venture agreement to develop a RM3b

wellness township at Iskandar with Temasek and Khazanah. Subsequently in Aug 2011, Sime became the largest

shareholder of E&O after acquiring 30% shares in E&O and form a strategic collaboration with the group with regard

to their property development businesses.

• The Sime Darby connections: Sime acquired 273m E&O Shares and 60m redeemable Convertible Secured Loan

Stocks (ICSLS) in E&O which translate to 30% equity interest. They acquired the shares from Dato’ Tham Ka Hon

(MD of E&O), GK Goh Holdings Ltd and Tan Sri Wan Azmi Wan Hamzah. The acquisition price was a hefty

premium of 57% over E&O share price. Nevertheless, it will be a long term strategic Investment instead of holding

for dividend yield. Sime Darby will be able to strengthen its foothold in Penang by participating in STP2 and E&O

could participate in some of the high end portion of Sime Darby Township. The framework of the partnership is

similar to UEM Land and Sunrise whereby a niche premium developer and a township developer complementing

each other with different set of expertise and strength.

Valuation and recommendation

• E&O earnings growth had been inconsistent over the past several years mainly due to the streamlining process,

delayed property launches as well as the lack of a sizable project to sustain the growth.

• Based on estimated timeline, the STP phase 2 should materialize in the next 3 years. Forecasted GDV for the

project is RM12b which will last for at least 7 to 10 years. The 3 years gap before first launch of STP2 is filled by the

“Medini Integrated Wellness Capital” project in Iskandar which has a GDV of RM3b.

• Apart from property, the Hospitality division is also expected to drive earnings growth with the completion of Annex

building of E&O Hotel and expansion of Delicious Group.

INVESTMENT STATISTICS

FY Mar FY10 FY11 FY12F FY13F

Revenue (RM’m) 352.4 271.3 452.8 696.8

EBITDA (RM’m) 119.1 72.6 161.2 143.4

Pretax Profit (RM’m) 93.5 48.3 151.4 109.3

Net Profit* (RM’m) 74.8 35.7 115.1 83.1

Net Profit Margin (%) 21.2 13.2 25.4 11.9

Basic EPS* (sen) 6.7 3.1 10.1 7.1

EPS Growth (%) -219.7 -54.3 230.5 -29.8

DPS(sen) 2.9 1.5 2.5 3.5

Dividend Yield (%) 1.8 0.9 1.6 2.2 Source: Company, Forecasts by MIDFR

*not adjusted for one off item


3

• We are positive over the long term prospect of E&O. Nevertheless, we are recommending NEUTRAL for E&O with

target price of RM1.70 which is a 20% discount against estimated RNAV per share of RM2.12. We are ascribing a

20% discount as E&O’s on-going projects are mainly high rise and high end project. We remain cautious on the

issue of supply overhang in that segment.

Realisable Net Asset Value

Klang Valley Land size (Acres) Stake (%) Value (RM m)

St Mary's Residence Jalan Tengah, KL (JV with Lion Group) 4.1 50 35.71

Jalan Teruntung, Damansara Heights, KL (The Peak) 3.9 100 118.92

Jalan Conlay, KL 1.4 100 126.24

Kemensah Heights, Ulu Kelang(Ampang Area), KL 309.5 88 355.92

Jalan Yap Kwan Seng, KL 1.3 100 101.93

Jalan Liew Weng Chee (Off Jalan Yap Kwan Seng), KL 0.9 100 35.28

Ukay Heights, Ulu Kelang (Ampang Area), KL 9.4 100 24.57

Penang Island

Seri Tanjung Pinang, Tanjung Tokong, Phase 1 240.0 100 233.09

Seri Tanjung Pinang, Tanjung Tokong, Phase 2 740.0 78 708.63

Gertak Sanggul, Southwestern Tip of Penang Island 365.0 100 333.89

Investment Assets Rooms/NLA (sq ft) Stake Value (RM m)

Lone Pine Hotel 90 100 67.90

E & O Hotel 100 100 210.48

Straits Quay 270,000 100 197.10

PER

FY13 Earnings Forecast (RM m)

Delicious Group 6 8 48.00

Other Assets 69.20

Net current asset 99.31

Long term liabilities -435.50

Total RNAV 2330.66

RNAV per shares 2.12

Target price (20% discount on RNAV per share) 1.70

Source: Company, Annual Report, Property Web Portals, MIDFR estimation


4

B. OVERVIEW

Property development

• Majority of land banks located in Penang Island: E&O has total 1,345 acres of land in Klang Valley and

Penang Island. 24.5% of total land banks are located in Klang Valley and 75.5% are located in Penang Island. 73%

of total land banks is the Seri Tanjung Pinang project in Penang Island. In 1992, E&O was granted the exclusive

right to reclaim and develop approximately 980 acres of land in Tanjong Tokong. Phase 1 of the reclamation has

been completed and E&O planned to start reclamation of the 740 acres by next year.

Landbanks

Land Area

Location

Klang Valley

1 St Mary's land at Jalan Tengah, KL (JV with Lion Group)

4.1

2 Jalan Teruntung, Damansara Heights, KL (The Peak)

3.9

3 Jalan Conlay, KL 1.4

4 Kemensah Heights, Ulu Kelang(Ampang Area), KL

309.5

5 Jalan Yap Kwan Seng, KL 1.3

6 Jalan Liew Weng Chee (Off Jalan Yap Kwan Seng), KL

0.9

7 Ukay Heights, Ulu Kelang (Ampang Area), KL 9.4

330.5

Penang Island

8 Seri Tanjung Pinang, Tanjung Tokong, Phase 1 240.0

9 Seri Tanjung Pinang, Tanjung Tokong, Phase 2 740.0

10 Gertak Sanggul, Southwestern Tip of Penang Island

365.0

Total 1345.0

Ongoing Projects

• St. Mary Residences (St Mary): St. Mary is located along Jalan Tengah, in between Menara Hap Seng 2 and the

former MAS building. Measuring 4.1-acres, St Mary is a 50:50 JV with the Lion Group. St Mary comprises of three

28-storey apartments with a total of 457 units. Tower B will be given to the original land owners, Anglican Diocesan,


5

in return for the land. Take up rates for Tower C was impressive as 80% were sold within 10 days of the launching

in mid-June 2009. Tower A is targeted for foreign buyers and marketing of the projects was held in Singapore,

China, and Indonesia. Official launching price for St Mary was RM1000psf, and the most recent asking pricing is

close to RM1,300psf. Current take up rate for the whole development is 85% and the construction of St Mary is

scheduled to be completed by mid-2012.

• Seri Tanjung Pinang (STP1) Phase 1: STP1 is located at Tanjung Tokong which is about 6min drive and 2.6km

distance from Gurney drive, Penang. STP1 stretches about 240 acres comprises of 325 units of Courtyard

Terraces, 214 units of Semi-D, 91 units of Seafront Villas, 48 plots of Bungalow Parcels, 1,247 unit of

condominiums, 217 units of service apartment, a retail mall measuring 270K sq ft, a 7-acre parcel of TESCO

hypermarket development and a few other smaller plots. Total GDV of the project is RM4b. Almost all the landed

properties had been completed, except for the final phase of Ariza terrace (35 units with GDV of about RM50m) and

Super link house (RM80-100m GDV).

• Record selling price of Quayside condominium: Ongoing projects of STP1 is the phase 1 of Quayside

Condominium which has a total GDV of RM900m and villas with GDV of about RM116m. Phase 1 of Quayside

Condominium comprises of 4 towers with total 698 units. 80% of the projects had been sold and construction is

expected to be completed by early 2013. Phase 2 of Quayside Condominium, Andaman comprise of 3 Towers with

total GDV of RM1.2b. Recently Tower 1 of Andaman was launched and the take up rate was about 50%. Average

selling price was RM1200psf and highest selling price was RM1,500. Upon reaching take up of 60/70% E&O will

open up the other blocks for booking.

Phase 1 of Seri Tanjung Pinang

Pipeline projects

• Jalan Yap Kwan Seng land; The piece of land is located near Jalan Tun Razak, within a short distance from

KLCC. E&O had planned for a service apartment with total GDV of RM400m. Average selling price of the project is

about RM1,300psf which is fair considering the prime location of the land. It is targeted for launching in about 8 to

12 months.

• RM12b Flagship development: The flagship development for E&O is the second phase of Seri Tanjung Pinang

(STP). According to the initial plan, phase 2 will be a mixed development comprising two islands of total 740 acres

in size. Residential property will be the key component in STP2, besides commercial and public spaces. At about 3

times the size of phase 1, initial projection of the GDV of phase 2 is RM12b as compared to phase 1 RM4b.

Nevertheless, we believed the GDV of phase 2 could be higher than RM12b based on the price appreciation

potential of STP properties.

• Target to start reclamation by the beginning of next financial year: E&O had received the approval in principle

for the master plan of STP2 from the Jabatan Perancangan Bandar dan Desa Pulau Pinang in Apr 2011. E&O is

currently finalizing the reports on environmental impact assessment as well as traffic assessment studies on the

land reclamation work of STP2. An international consultant had been engaged to review the report. E&O planned to


6

submit the report to the authorities in the next few months. Upon obtaining the approval, E&O will be able to start

the reclamation work at the beginning of next financial year. After two years from the start of the land reclamation,

the first project will be launched.

• Funding is the key issue: The funding for the reclamation of land for STP2 would stretch the capacity of E&O, as

per sq ft reclamation cost is about 20 to 30% higher than STP1. Higher cost projection was mainly due to deeper

water of phase 2 as well as potentially higher operating cost. There are no concrete details provided by the

management, however based on our estimation total reclamation cost could be about RM3.5b (based on per sq ft

reclamation cost of RM108 psf).

• Solving the funding issue: Gearing of E&O stands at 0.22X and cash and balance is about RM489m. Assuming

E&O kick start the project with its own capacity by securing 90% bank financing for the reclamation, gearing will

increase to about 2.4X. Nevertheless, we believe gearing level of 2.4X is not sustainable for E&O even with future

income generated from the sales of the remaining project of STP1. We reckon E&O will explore other alternatives

include completing the reclamation in phases, or inviting other developers as the joint venture partners. There are

some other parties include international groups which had expressed their interest in STP. If the project kick off well,

STP2 would take the E&O brand to the next level and support the group's aspiration to extend the brand regionally

(E&O signed deal with MITSUI to promote STP in Japan). We reckon Sime could be the joint venture partner for

STP2 as the two companies had entered into a three-year collaboration agreement to formalize a broad

collaborative framework with regard to their property development businesses.

• Maiden Foray to Iskandar Malaysia: In 2011, E&O entered into a 50:50 joint venture with Pulai Indah Ventures to

development a piece of land measuring about 210 acres in Iskandar Malaysia. Pulau Indah Venture is a 50:50 joint

of Khazanah and Singapore’s Temasek Holdings. E&O will be responsible for the overall project management as

well as marketing and sales. It was a timely acquisition as the development of STP1 is in the final phase and STP2

will take at least another 3 years to materialised. In the mid to long term, other pocket development will not be able

to generate significant income to sustain earnings growth. Located within the Medini Central Development cluster

(one of the development cluster of Medini Iskandar), the land is about 15 min drive from Tuas Second Link.

• Wellness Concept : The land will be developed into a first of its kind wellness-based township in the region named

“Medini Integrated Wellness Capital”. Total GDV for the project is RM3b. The Wellness Capital will be divided into 2

parcels of development which is the Medini Estate (The overall development) and the Medini Sanctuary (its 12.5

acre core). The township is fringed by a natural mangrove forest. An operator would be brought in to run the

Sanctuary by the end of the year. Based on initial planning, the residential side would comprise of 96 bungalows, 68

Semi-D, 445 terrace houses, 1,415 condo and one block of serviced apartments. 18 acres have been earmarked for

commercial property. Rendering the wellness theme, E&O will allocate 20 acres for food planting and fish farming.

Target market for the project are mainly locals and foreigners above 40 years of age and from the middle-income

group. The development is expected to generate about 20% to 25% margin, which is within the normal margin of

E&O’s projects.

• Other developments: Due to the proximity to the new Palace, the Peak will be subdivided into 10 individual plots

for sale. A quick check on property portal indicate selling price between RM600-RM800 for residential land within

the locality. Assuming a conservative price of RM650psf, E&O could gain about RM110m sales from the project.

E&O also owns 310 acres of land at Kemensah Heights near to the Ampang Forest Reserves, a pocket size land at

Jalan Conlay as well as Ukay Heights. The development for all these projects will not take off in the shorter term as

most of these projects are in the early stage of planning.


7

Location of Medini Integrated Wellness Capital

Hospitality

• Hospitality & lifestyle: Hospitality division registered revenue of RM68.8m or 25% of the top line of E&O in FY11.

In FY12, we are expecting hospitality division to generate strong revenue growth of 165yoy to RM80m, mainly due

to the expansion of The Delicious Group.

• Hospitality: E&O owns the Eastern & Oriental Hotel and Lone Pine Hotel which occupied 2 heritage buildings in

George Town and Batu Feringghi respectively. E&O Hotel was established by the Sarkies Brother in 1885 and won

multiple awards with the rich history and preservations of the building. There are total 100 suites in E&O Hotel

which will increase to 239 upon the completion of an annex building in 2012. Average room rate of the hotel is about

RM540 and average occupancy rate is about 65%. Lone Pine Hotel was established in 1948, along the along Batu

Ferringhi coastline in Penang. Lone Pine is the only boutique hotel at the popular tourist spot. Average room rates is

about RM450 and average occupancy is slightly more than 60%. Leveraging on the expertise of the hospitality

division, the group set up E&O concierge which will provide pay on demand F&B and housekeeping services to

E&O’s service residence include Dua Residency, St Mary Residence and The Marina (Service apartment on top of

the Straits Quay Retail Mall).

• Food & Beverage venture: Apart from Hotel operations, E&O embarked on food & beverage venture via the

acquisition of Delicious Group (Delicious) for RM11m. E&O bought 51% of Delicious in 2007 & acquired the

remaining shares in 2010. The Delicious Group comprises of 8 restaurant, a fine dining (Dish) and a Hong Kong

style restaurant (Reunion). 4 of the restaurants (Bangsar Village 2,Mid Valley, One Utama, Sunway Pyramid) are

located at established retail Mall in KL and 2 within the retail podium of High end condominiums (Dua Residency

and Marc Residency).

• Expanding to Singapore: In 2011,Delicious open its first overseas outlet in Scotts square Singapore. Expansion

of Delicious Restaurant also create synergies via the strategic positioning of Delicious Group outlets in E&O’s

commercial/retail properties (Straits Quay & Dua Residency). E&P had targeted to open 3 Delicious Restaurant in a

year and one of the new restaurant is located at E&O’s St. Mary Residence. Apart from restaurant business,

Delicious group also provide catering services.


8

E&O Hotel Lone Pine Hotel

• Property Investment: Straits Quay is a retail mall located at the 12.4 acre retail enclave within Seri Tanjung

Pinang. Opened in Nov 2010 with NLA of 270,000 sq ft, occupancy of Straits Quay is about 70%. Straits Quay will

feature a comprehensive mix of outlets and attractions; from boutiques to bistros, seafood restaurants to seaside

cafes, bars to boat rides, as well as a promenade, a performing arts centre and a learning centre. The main

attraction is a 40 pontoon berths for vessels between 10-20m length overall(LOA). Some sporting and lifestyle

oriented events held at South Quay Marina include Water Ski competition involving local and international

champions. The retail mall contributed about RM7m to the top line and marginal contribution to earnings.

Nevertheless, we believe the retail mall will grow into an important asset for E&O in the longer term. Other

investment assets include the commercial block of Dua Residency and the retail podium of the St Mary Residence.

Straits Quay Retail Marina


9

Appendix

DAILY PRICE CHART

Zulkifli Hamzah Sean Liong Cheng Fatt [email protected] 03-2173 8227

-100

0

100

200

300

400

500

600

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

RM m Financial Performance

Revenue Operating Income Pretax Income

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

%Margin Trend

Operating margin Pretax margin


10

Financial Highlights

Profit & Loss (RM’m) FY09 FY10 FY11 FY12F FY13F

Revenue 304.4 352.4 271.3 452.8 696.8

Gross Profit 68.5 123.7 99.0 145.7 236.0

Operating Expenses -95.5 -68.1 -69.8 -83.8 -133.9

Operating Profit -6.9 109.0 61.9 150.0 132.2

EBITDA 5.0 119.1 72.6 161.2 143.4

Depreciation & Amortisation 12.2 10.3 10.9 11.3 11.4

Net Interest Income/Expenses -28.3 -23.0 -28.1 -32.0 -33.6

Income from Associate & JV -2.9 7.5 14.5 33.4 10.7

PBT -38.1 93.5 48.3 151.4 109.3

Tax 6.1 -18.6 -12.6 -36.3 -26.2

PAT -32.0 74.8 35.7 115.1 83.1

Balance Sheet (RM’m)

Fixed Asset 1033.4 1094.2 1256.4 1241.6 1276.9

Other Fixed Asset 58.0 57.2 58.8 43.1 27.3

Total Non Current Asset 1091.4 1151.4 1315.2 1284.7 1304.2

Cash and Cash equivalents 245.3 559.3 309.4 499.3 510.0

Inventories 96.2 55.3 38.4 38.8 38.8

Trade Receivables 105.9 57.4 123.5 112.8 135.1

Other Current Asset 433.1 357.3 330.4 303.8 358.7

Total Current Asset 880.5 1029.3 801.7 954.7 1042.7

Total Asset 1971.9 2180.7 2116.9 2239.4 2346.9

Trade Payables 167.7 112.0 130.5 113.0 143.0

Short term borrowings 397.5 381.9 379.1 376.6 394.0

Other Current Liabilities 2.8 5.2 30.5 7.4 7.4

Total Current Liabilities 568.0 499.1 540.0 497.0 544.4

Long term borrowings 520.9 564.4 446.0 364.0 384.0

Other Non Current Liabilities 47.1 47.8 48.9 48.0 48.0

Total Non Current Liabilties 568.0 612.2 495.0 412.0 432.0

Total Liabilities 1136.0 1111.3 1035.0 908.9 976.3

Total Shareholder fund 814.4 1043.3 1057.6 1303.5 1343.1

MI 21.5 26.2 24.3 26.8 27.5

Source: Annual Report, MIDFR estimation


11

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X).

(Bank Pelaburan)

(A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER

This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for

distribution only under such circumstances as may be permitted by applicable law.

Readers should be fully aware that this report is for information purposes only. The opinions contained

in this report are based on information obtained or derived from sources that we believe are reliable.

MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or

implied, as to the accuracy, completeness or reliability of the information contained therein and it should

not be relied upon as such.

This report is not, and should not be construed as, an offer to buy or sell any securities or other

financial instruments. The analysis contained herein is based on numerous assumptions. Different

assumptions could result in materially different results. All opinions and estimates are subject to change

without notice. The research analysts will initiate, update and cease coverage solely at the discretion of

MIDF AMANAH INVESTMENT BANK BERHAD.

The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may

have interest in any of the securities mentioned and may benefit from the information herein. Members

of the MIDF Group and their affiliates may provide services to any company and affiliates of such

companies whose securities are mentioned herein This document may not be reproduced, distributed

or published in any form or for any purpose.

MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

TRADING BUY Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Negative total return is expected to be -15% over the next 12 months.

TRADING SELL Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.

Documents

Eastern & Oriental Berhad - I3investor