CBRS: E&O Bhd - BUY - 8 Aug 2008

CBRS: Eastern & Oriental - Merger completed successfully (Company Update)



Price: RM1.08

Target Price: RM3.70

Recommendation: BUY



· De-listing of E&O Property Development (ENOP) today. The merger between Eastern & Oriental (EOB) and its 63%-owned property development arm, ENOP, was successfully completed by issuance of 172.9m new EOB shares and RM212.7m cash to the ENOP minority shareholders (MI). The outcome was as predicted as we expected EOB to exhaust the entire cash allocation of RM213m for the merger exercise. This implies that 65% of ENOP MI shares were converted to new EOB shares on a 1:1.1 basis.

· Upward revision in FY09E and FY10E net profit by 45% and 49% to RM71m and RM77m, respectively, due to the significant reduction in minority interest arising from the merger. However, we have also toned down our assumptions in terms of size of first launch of Seri Tanjung Pinang 1 (STP1) condominiums for FY08 (recall that the STP1 condominiums has a GDV of RM1.5b and will be launched in several phases over the next 2 to 3 years). As STP1 earthworks and pilings are typically completed before launch, earnings contributions can be felt quickly. Hence, this adjustment slightly softens enhancement of earnings from the merger.

· Potential synergies ahead with a single-listed entity. Besides the consolidation of earnings, we can expect 1) streamlined operations which enable the combined group to further realise the value of its assets 2) greater flexibility in earnings drivers to suit market conditions 3) alignment of both shareholders interest which circumvent future conflict of interests 4) potential overseas expansion as a wholly owned ENOP enables EOB to potentially sell part of a stake to an international developer.

· Reiterating our BUY recommendation with an enhanced target price by 3% to RM3.70, based on conservative sum of parts RNAV on a fully diluted basis. FY09E and FY10E PERs are extremely attractive at 9.1x and 8.3x due to an enhanced EPS by 5% and 5% to 11.9sen and 13.1sen, respectively.