By THE STAR
THE shift is visible. E&O Property Bhd (E&OP) is steadily emerging as one of the most attractive property plays in the stock market.
Its main appeal – the company is the largest property developer in Penang with about 1,350 acres in George Town and 350 acres in Kuala Lumpur city centre.
Some analysts say that in Kuala Lumpur and Penang, E&OP has the largest prime land bank.
Presently, it already has a growth development value (GDV) of RM15bil.
Out of this, RM10bil comes from Penang, and the remainder from Kuala Lumpur.
Due to its strength in the middle to high-end development, analysts are anticipating net profit to grow by a compounded rate in excess of 30% over the next three years.
And because of its dominant presence in high end markets, it also has the highest leverage in the sector to property price increases, where every 1% increase will boost its revised net asset value by 14.2%, versus the sector average of 8.2%.
When the exemption of real property gain tax was first announced in March, it wasn’t merely a knee-jerk reaction when Penang property stocks started rallying.
Penang is widely seen as one of the largest beneficiaries of the Malaysian property play given that it has the best demand-supply balance among developed states.
Property in Penang has generally done superbly thanks to the pent-up demand and the limited amount of land bank on the island. E&OP has been shrewd and has been aggressively embarking on land bank acquisitions in premium areas to capitalise on the property boom.
During an analyst briefing on Tuesday, not only did E&OP announce results that were slightly above consensus, it also announced two acquisitions that were going to be earnings accretive almost immediately.
Results wise, E&OP lived up to its premium name when for its financial year (FY) ended March 2007 – revenue was up 50.93% to RM492.2mil while net profit was up 103.32% to RM131.76mil.
Stripping out its ex-exceptional gain, E&OP’s financial year (FY) 2007 net profit rose 47% to RM95mil, underpinned by a stronger second half, which represented 57% of the year.
New sales in FY07 came to RM460mil and unbilled sales amounted to RM300mil as at March 31. E&O Property’s operating margin expanded by 27.7% due to tail-end billings related to its Dua Residency and Idamansara developments.
Meanwhile, net profit and revenue for the fourth quarter fell 31% and 4% on a quarterly basis as a result of lower property billings. This was due to a lull in sales as bumiputra units (Dua Residency and Idamansara) remained unsold.
Analysts are expecting a pickup in the first half of 2008, assuming that legal authorisation for sales to nonbumiputras coincides with completion.
No dividend was proposed for the fourth quarter. A gross dividend of 23 sen gross had been distributed during the year. At present, E&OP has no dividend policy but one is likely to be established.
“E&OP’s recent moves, which include its land acquisitions, stake increases at Seri Tanjung Pinang and overseas plans should further strengthen its branding and appeal,” says one analyst from a foreign brokerage.
More recently, there was an acquisition to further entrench its position as a blue chip developer. Via its wholly- owned subsidiary, Kamunting Management Services Sdn Bhd, E&OP had entered into a share sale agreement with North Zest Sdn Bhd for a 24% stake in Bridgecrest Resources Sdn Bhd for RM25mil.
E&O Property presently owns 70% of Bridgecrest, which in turn is the intermediate holding company of E&O Property (Penang) Sdn Bhd (EOPP) and Tanjung Pinang Sdn Bhd (TPD).
EOPP is the master developer of about 240 acres of Seri Tanjung Pinang (Phase 1) while Tanjung Pinang is the concession company approved to reclaim and develop 740 acres off Tanjung Tokong (Seri Tanjung Pinang, Phase 2). On a per sq ft basis, E&OP puts the acquisition price at RM7.12 per sq ft.
“This is cheap on a gross basis, but we need to bear in mind that Phase 2 is a concession. There is still no land and has yet to be reclaimed. They are basically buying rights to develop that area. So there will also be cost involved to reclaim the land,” says the analyst from the foreign brokerage.
To sum it up, the proposed acquisitions will increase E&OP’s interest in EOPP from 70% to 94%, while its interest in Tanjung Pinang Sdn Bhd would increase from 65.88% to 77.98%. This acquisition is pending FIC approvals and should be completed within two months.
Deutsche Bank analyst Chia Aun- Ling, in her report dated May 29, views this acquisition positively.
“In terms of earnings, it should enhance E&OP’s FY08-09 net profit by an additional RM12mil- RM26mil net profit (due to lower minority interest) respectively.
This means that the RM25mil acquisition cost should be recovered in one-two years,” she says.
Strategy Moving Forward
During the analyst briefing, management also mentioned that it plans to enhance its position to ride the property upcycle. Other than its ongoing property launches in Kuala Lumpur and Penang projects, over the next six months, E&OP plans to go on the aggressive to build up its premium land bank, especially in Kuala Lumpur.
“It may look to acquire outright or via joint ventures. Management needs to secure at least two pieces of land in KL to sustain its earnings beyond the next five years,” says the analyst.
The analyst expects at least two such acquisitions in FY07. This, if successful, should underpin its medium-term earnings growth momentum. For the medium to longer term, E&OP is reviewing alternative locations in the prime areas of Johor and the Asian region.
Chia has raised her 12-month target price to RM5 following the proposed acquisition of an additional stake in its Penang project. We expect that the acquisition would be earnings and RNAV accretive.
Accordingly, Deutsche’s RNAV has been upgraded to RM5.13 per share, valuing the existing and imminent projects at a discounted cash flow (at a weighted average cost of capital of 7.7%) and the undeveloped land bank at market prices.
“We maintain Buy on E&OP, one of our top picks for the Malaysian property sector given its high-end luxury niche exposure. We continue to see E&OP enjoying strong pricing power given little competition in the high-end luxury space as well as growing demand from both domestic and foreigner investors,” says Deutsche.
Meanwhile, parent company Eastern & Oriental Bhd (E&O) has proposed to dispose of 90 million E&OP shares, representing 13.8% of the issued and paid up share capital of E&OP.
If completely implemented, the proposed E&OP disposal will result in E&O’s effective equity interest in E&OP being reduced from 64.04% to 50.28%.
E&O plans to utilise the proceeds to finance the expansion of its property investment division and hospitality division.
It has also proposed to dispose of up to 68.6 million Putrajaya Perdana Bhd Shares, representing 50.8% of the issued and paid-up share capital of the latter.