E&O Berhad - BUY - 15 May 2008

CBRS: Eastern & Oriental Bhd - Fueling Brand Power (Initiating Coverage)



Price: RM1.65

Target Price: RM3.54

Recommendation: BUY



· Making a name in real-estate. Eastern & Oriental Bhd (EOB) core business is in property development (via its 63%-owned E&O Property Development Bhd (ENOP)), hospitality and property investment. EOB made its name by successfully restoring Penang's heritage E&O Hotel. Subsequently, they ventured into property development by acquiring ENOP (previously Kamunting Corp Bhd) in 2003. Since then, they have successfully completed and sold high-end projects in prime areas of KL (Dua Residency, Idamansara and Seventy Damansara).

· Brand power is what drives EOB's corporate goals to create strong sustainable income in the long term. Fuelling this strategy are aggressive overseas marketing, c.1,600ac of prime development land in KL and Penang, and ability to meet discerning taste of high-end property buyers.

· Consolidation removes conflict of interest of the MI of two listed companies. EOB can then fully consolidate ENOP's earnings and will have more flexibility in realising the value of its assets and greater financial muscles to seize opportunities. Upon completion of the merger process (by mid July 08), we are expecting at least 65% of ENOP MI shares to be converted to EOB shares on a 1:1.1 basis, which will result in a 11% upside in FY09E EPS to 10.2sen.

· Capitalizing on prime land and high-end property expertise. ENOP plans to launch its first phase of 7 high-end condominium blocks of GDV RM1.5b, in Seri Tanjung Pinang Phase 1 (STP1) and the RM1b St Mary service apartments JV project by end 2008. Earnings contribution will be in FYMar10 onwards. We expect the projects to do well, given the strategic location and ENOP track record.

· Targeting RM1b investment property (IP) portfolio within 5 years, for strong recurring income in the long-term. EOB intends to buy properties developed by ENOP (STP1 Marina Retail, Dua Residency Annexe, etc) to preserve asset values and increase brand visibility. Significant income flow should be visible in the next 2 to 3 years.

· Target price of RM3.54, based on our fully diluted sum of parts RNAV. Our valuations are conservative as we have yet to factor in yield effect from its IP portfolio. We are also estimating 116% YoY growth for FY08E net profit of RM132m, on the back of RM99m gains from sale of Putrajaya Perdana Bhd, more progress billings and take-up rates from Dua Residency, Idamansara and STP1 with RM200m unbilled sales. Initiating with a BUY recommendation.







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