Early this month, E&O announced the entry of KWAP as a strategic investor in their flagship Seri Tanjung Pinang (STP) 2A project. This corporate action is arguably one of the most important catalyst that would enable E&O to trade closer to its full value. Interestingly, E&O share price has retraced by 20% from the peak since the news was announced. Did the market misread the event? Or did the share price moved ahead of the fundamentals?
Now, let’s take a closer look at this deal. KWAP is buying 20% of the STP 2A land from E&O for RM 766 million. The land sale would comprise 8 plots of land in STP 2A with total size of 33.43 acres or 1.45 square metres. The most important detail from this transaction has to be KWAP buying the land at the price of RM 530 per square feet. Hence, using the same valuation, that would put the whole STP 2A land value at RM 3.83 billion. This STP 2A land value alone would have worth more than E&O total market capitalization of about RM 2.3 billion.
In the same deal, E&O will be issuing 5.3% of new shares to KWAP at the issue price of between RM 1.84 to RM 2.04. If one were to invest now (Current share price as of 20th April = RM 1.87), the individual would be investing together with one of the largest pension fund in Malaysia at the same entry price. I believe KWAP is seeing value in E&O’s shares and hence, a direct investment in the company. At some point, it is logical that KWAP and other investors could be expecting some form of real returns in dividends.
Having a strong strategic partner in KWAP is a huge confidence booster and this partnership will not go unnoticed among the institutional investors and bankers. E&O should not have any problem with future capital funding and that makes the STP 2A project a go. Based on an article that I read in Focus Malaysia, many analysts had thought that the land sale was conducted at a cheap price, possibly due to the current subdued property market. Well, to kick start the whole development, E&O has to sell to raise money. In a normal property cycle, I believe STP 2A would have worth a lot more.
In fact, the Penang state government is tendering state land at prices of more than RM 1000 psf. Remember last year, EWEIN berhad bought 50 scres of land in Bandar Tanjung Pinang for RM 2.8 billion or about RM 1300 psf! It should be noted that this piece of land is located just infront of Gurney Wharf or the Millionaire’s row which might have give it certain premium valuation. The STP 2A land, however, would be located about 1KM away from the same EWEIN land and will be fronting Penang’s beautiful sea. In my opinion, STP 2A land’s fair value should trade closer to the current market value of RM 1000+ psf.
Now we know that STP 2A land is worth a lot. The next question is how much is E&O worth as a whole? In addition to STP2A, E&O also has several ongoing projects that are worth RM 400-500 million in Penang, KL, Johor and even UK. Besides, it also has several undeveloped landbanks in Klang Valley and Penang worth about RM 1.3 billion. To determine the fair value of E&O, MIDF investment analyst had done a very good job estimating the RNAV of the company at RM 5.84.
At RM 1.87 per share, E&O is currently trading at an extremely depressed valuation of 70% discount to RNAV. In my opinion, such depressed valuation should not happen. If we look at the valuation of other property players, both Mahsing and Ecoworld is trading at about 50+ % discount to RNAV. Is the market suggesting E&O will not do better or at least on par with the above mentioned companies?
Back in 2011, Sime Darby had caused a great hoo-ha paying a huge premium for a stake in E&O. I remember in that period the public uproar was so huge that Sime Darby published an explanation justifying the stake purchase. At that time, Sime Darby valued E&O at 20% discount to RNAV. This is the discount quantum we should be expecting from E&O during a property bull market. Interestingly, the managing director of E&O has been buying back E&O’s shares aggressively over the last few years. His entry price was between RM 2.60 to RM 2.90. When a MD is buying 0.01% of his companies shares, it is okay to ignore. But when a MD is buying 20-30% of his company at a premium, that explains how much confidence the insider has for the future of the company.
In my opinion, E&O is a long term asset play that is widely ignored. Perhaps it is unloved due to the current subdued property cycle. Based on my observations of liquidity, it seems EPF, Tabung Haji and CK Goh are disposing some of their shares in the company. When the selling by other institutional is done and as news of the development’s progress come online, I believe E&O would be rerated by the market. No matter an up or down cycle, E&O should at least trade at similar valuation with its peers. Assuming a 50% discount to RNAV, the first target price that we could see is around RM 2.90 (Which also indicates a potential upside of about 50% from the current share price).
Disclaimer: This article is not an invitation to buy or sell any of the stocks mentioned by the author. This article serves as a personal educational material and you should always consult an expert’s advice should you decide to act in any ways.