By A. Stephanie
Analysts remain cautious on Eastern & Oriental Holdings Bhd’s (E&O) due to a dimming property outlook despite recent project announcements. Will the Penang heavyweight be able to weather the storm with its model of luxury projects and foreign investors?
Business model: Penang-based Eastern & Oriental Bhd (E&O) is a niche residential property developer, with luxury projects located in Penang, Kuala Lumpur and Iskandar Malaysia, Johor.
In recent years, it has started reclaiming land and developing its flagship 980-acre Seri Tanjung Pinang seafront community project as per its 1990 concession agreement with the Penang government. As the 240-acre phase one nears completion, E&O has started planning phase two, which will be built over 15 to 20 years.
The group also owns two heritage hotels in Penang – Eastern & Oriental Hotel and Lone Pine Hotel – and the contemporary E&O Residences, Kuala Lumpur. Its hospitality activities extend to food and beverage operations, as E&O owns the Delicious Group of restaurants, with outlets in Kuala Lumpur and Singapore.
It made its maiden venture overseas in 2012, when the group acquired Princes House, a prime freehold office property in central London. Playing to its residential strength, E&O expects to complete converting and refurbishing the Westminster building into 54 residential units and serviced apartments by 2016. Earlier this year, E&O UK followed this up by acquiring the Landmark House and Thames Tower office buildings, both in central London.
The announcement of its joint venture (JV) with Mitsui Fudosan is its third with the Japan giant, following a similar 51:49 shareholding in its wellness themed Mews Residences in central KL in 2013, and a 2011 marketing collaboration agreement to market E&O properties to Mitsui’s high net worth clientele in Japan.
Shareholders and management: Sime Darby Bhd owns 21.95% in the counter, after selling 9.9% of its stake last June to Morning Crest Sdn Bhd, which is owned by E&O managing director Terry Tham Ka Hon in what was suspected as a bid to keep him in the company. Tham currently has a direct 10.9% stake in the outfit and another 6.75% via Morning Crest. GKG Investment Holdings Pte Ltd, owned by Singaporean tycoon and stockbroker Goh Geok Khim, has a 7.21% stake in E&O.
In 1994, Tham took over Jack Chia Enterprises Bhd which was later renamed E&O and spearheaded the group’s Kuala Lumpur city centre developments, namely 202 Desa Cahaya, Kampung Warisan and Sri Se-Ekar, as well as refurbishment of the two Penang hotels. He has been a part of the industry since 1980, and oversaw the completion of Bandar Sri Damansara while heading Land & General Bhd’s property division. He is also a director of Penang’s Performing Arts Centre, which E&O sponsors.
Group deputy managing director since 2011, Chan Kok Leong joined E&O Property Development Bhd in 2003 as corporate and investment director. He has more than 20 years’ experience in these areas, holds an MBA and is a member of the Malaysian Association of Certified Public Accountants. He is currently the E&O Property Development Bhd executive director and is also a director of Penang’s Performing Arts Centre.
Share performance: As at 1pm March 31, E&O’s share price is RM2.01, 7.8% down from its closing price of RM2.18 on April 1 last year. An MIDF Research report yesterday put the counter’s beta coefficient at 1.18, 18% more volatile than the market. E&O’s unit price within the last 52 weeks traded between RM1.85 and RM2.92, according to Bursa Marketplace.
What analysts think: In March, analysts have been busy on the E&O counter due to the release of its lacklustre 3Q15 results on March 1, and the announcement of the JV with Mitsui Fudosan on March 22.
Across the board, E&O’s 3Q15 net profit of RM11.4 million fell way short of analyst expectations. This came on the back of RM9 million of sales due to lack of launches.
However, with the exception of the RHB and MIDF analysts, research houses chose to maintain their “neutral” or “hold” calls on the counter, expecting 4Q15 (for the quarter ended Mar 31, 2015) to bring in substantially higher earnings due to new launches.
CIMB Research expects 4Q15 to be stronger due to Penang and Johor sales campaigns, while the group’s following quarter is forecasted to improve significantly following the soft launch of the second Tamarind residences in Penang.
“Response to the first block with a gross development value (GDV) of RM450 million has been strong at over 90% units booked. There are already 2,000 registrants for the second block, and this will be opened for bookings once sales and purchase agreements for the first block is wrapped up,” CIMB Research said.
AmResearch said its “buy” call was premised on the highly coveted Seri Tanjung Pinang 2 (STP2) and significant accretion to net asset value, adding: “Our thesis continues to centre on E&O unleashing the deeply embedded value of STP2, as it monetises the land after the award of the reclamation contract.
“Our estimated break-even cost for STP2 is about RM2.8 billion, or RM94 per sq ft on gross land area versus our estimated land value of RM500 per sq ft,” it said.
Its results and future projects failed to impress the RHB and MIDF research houses, however. RHB downgraded the stock from “buy” to “neutral” while MIDF took it a step further, downgrading from “buy” to “sell”.
“Material news flow may come only in 2Q16 as the tender for STP2 reclamation should only be awarded then – a slight delay from its initial target in March, due to longer internal processing,” RHB noted.
Following the Japanese tie-up announcement three weeks later, RHB reiterated its “neutral” call, remarking: “Although E&O can realise an upfront gain from the JV with Mitsui Fudosan, the sector fundamentals remain weak as banks continue to tighten mortgage lending.”
As a result of the JV, E&O will be able to realise a net gain of RM48.8 million in 4Q15 (end March).
MIDF, meanwhile, took the JV more positively, upgrading E&O to “neutral” on the back of the announcement, as well as the good take-up rate of Tamarind’s first block.
The JV plan is to develop 298 units of service apartments with GDV of RM800 million, with development starting in 3Q15 and completion by 1Q20.
MIDF said it was positive on the news due to the expected increase in FY15 core net income as well as potential new sales in the future from this project.
“We have increased our new sales target to RM940 million for FY15 in view of the good take-up rate for Tamarind project. Nevertheless, we think FY16 new sales should stay flat at RM932 million due to challenging outlook on the property sector in Malaysia,” the research house said.
Analysts across the board are confident of E&O achieving its targeted profit after taxes for FY14-FY16 of RM450 million to RM500 million.
Earnings forecast:
StockStalk: With the property expected to slow down over the next year or so, and buyer reticence due to the implementation of the goods and services tax, analysts have remained cautious on E&O’s near term earnings. However, its name has long been associated with niche luxury developments and exposure to foreign buyers.
For previous launches across all its properties (Penang, KL, Iskandar and London), the company has brought them to the attention of foreign buyers in Taiwan, China, and Japan, to name a few. The collaboration with Mitsui Fudosan is expected to bring in even more Japanese investors, and perhaps this might offset the hesitance by local buyers.
E&O’s niche also means luxury residences in prime areas are constantly in demand, and less susceptible to the ups and downs of the property sector. The Jalan Conlay area’s prime location in relation to both KLCC and Pavilion as well as offices and various five-star hotels will only push its value up – and E&O knows this. While the stock has been plateauing for a while due to lack of launches, perhaps it is time to move in before its flagship projects and earnings from overseas investments kick in.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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