During the AGM/EGM yesterday, E&O’s Deputy Managing Director Eric Chan said it has shortlisted two foreign firms as the possible contractor to undertake the Seri Tanjung Pinang Phase 2 (STP2) reclamation works. It is at the contract pricing stage, which had to be recalculated due to the Ringgit’s depreciation and lower fuel costs. The contract should be awarded by year-end. Shareholders approved the proposed listing of its UK operations under E&O Plc on the Alternative Investment Market of the London Stock Exchange. E&O expects to receive all approvals from the relevant authorities by year-end and list E&O Plc in 1Q16. E&O maintains its three-year profit after tax (PAT) target of RM450m in FY14-16, which implies a net profit of RM173m in FY16 despite a challenging outlook due to the soft property market (Malaysian Reserve).

Comments: There has been further delays in the appointment for the contractor from the earlier time line of 3Q15 to 4Q15 due to the weakening Ringgit. We understand that E&O is looking to price the reclamation contract in Ringgit to avoid currency risk. Foreign contractors that incur certain costs in US$ are concerned with the margin squeeze if the Ringgit weakens further. But this is offset by lower fuel prices, which is also a substantial component of reclamation costs. The proposed listing of the UK operations will allow E&O to reduce its gearing.

Our PAT forecast of RM148m for FY16E is below the company’s target of RM173m. E&O could sell more of its property assets to meet its target, which we did not factor into our forecasts. No change in our earnings forecasts for now.

We believe the share price may consolidate at current levels pending the award of the reclamation contract. On a 12-month view, we maintain our BUY call with RM2.54 target price, based on 40% discount to RNAV. We believe the STP2 project will take off and provide the catalyst for the stock outperformance given the current attractive Price/RNAV of 0.4x.

Source: Macquarie Research - 30 Sep 2015