We  maintain our TRADING  BUY  rating  and  FV  of  MYR2.60.  Two  strong catalysts will drive E&O’s share price higher over the next few months. Its recent call for a public forum for an environmental impact study on Seri  Tanjung  Pinang  2  (STP2)  is  a  big  step  forward  for  value crystallisation.  In  addition,  a  general  offer  (GO)  could  be  on  the  cards, as Sime Darby has recently increased its shareholding in E&O to 32%. 

- Progressing  as  scheduled.  E&O  has  announced  that  a  dialogue regarding a  detailed environmental  impact  assessment  (DEIA)  study  on STP2  will  be  held  on  24  Aug.  This  public  forum  is  part  of  the requirements  under  the  DEIA  that  E&O  is  conducting.  It  will  need  to incorporate  those  comments  into  its  final  EIA  report  and  submit  for approval. We expect this will take another 2-3 months.

- Potential boost to gross development value (GDV). Land is valuable on Penang Island due to its scarcity. The public forum is a major hurdle before  the  State  Government  gives  the  760-acre  development  the  nod. More  importantly,  by  requirement,  110  acres  (net)  of  STP2  land  will  be surrendered  to  the  State  as  payment  in-kind  to  fund  infrastructure projects on the island. Assuming a blended average price of MYR1,100 per sq ft (psf) (vs MYR765 psf for STP1) for the mix of landed and high-rise  developments,  STP2’s GDV  could  amount  to  a  massive  MYR18-20bn.  Our  assumptions  are  reasonable,  as  STP1’s  super-link  and Andaman  2  units  are  now  selling  at  MYR770  psf  and  MYR1,400  psf, respectively.

- Potential  GO?  Since  initiating  coverage  on  the  stock,  we  have  always seen  E&O  as  a  potential  takeover  target,  whether  the  acquirer  is  major shareholder  Sime  Darby  (BUY,  SIME  MK,  TP:  MYR10.70)  or  another party.  Apart  from  Sime, E&O’s valuable brand is a good fit for other developers  that  do  not  have  a  niche  in  the  high-end  luxury  segment.  A GO could be on the cards, as Sime has gradually raised its shareholding to 32% (as at 31 July). If the 33% threshold is triggered, Sime will have to  make  a  GO.  We  note  that  Sime  has  been  mulling  the  listing  of  its property  division,  and  could  pool  all  its  property  assets  together, including its stake in E&O and Battersea, in the listed company.  

- News flow to drive share price. We maintain our TRADING BUY rating with an unchanged FV of MYR2.60, a 35% discount to RNAV. 

Source: RHB