E&O Berhad - STP2 Is Important And Valuable (OSK)

• Land swap an option for funding solution. It was reported that the Penangstate government has managed to convince the concessionaire for the RM8bn integrated road infrastructure projects by using 110 acres of prime land at Seri Tanjung Pinang 2 (STP2) as payment in lieu. According to the State public works, utilities and transport committee chairman Lim Hock Seng, the 110-acre land is worth “several billion ringgit”. The integrated road project, which is part of the Transport Master Plan, includes a 4.2km bypass from Gurney Drive and Lebuhraya Tun Dr Lim Chong Eu, a 4.6km bypass between Lebuhraya Tun Dr Lim Chong Eu and Bandar Baru Air Itam, a 12km-paired road from Jalan Tanjung Bungah to Teluk Bahang, and the 6.5km Penang-Butterworth sea tunnel. Out of the four road projects, only the tunnel will be tolled. To recap, E&O was given the right to reclaim up to 980 acres by the previous state government, and the company has already reclaimed 220 acres for STP1.
  
  
• STP2 more valuable. This news is favourable to E&O, as it signals the state’scommitment to ensure the STP2 project materialise. In other words, the 760-acre yet-to-be-reclaimed land is an integral part of the solution for the state to fund the infra works. We understand that the 110 acres (on net basis) consists of several parcels spread across the entire STP2. From the state’s perspective, we believe the land will be priced lucratively. Based on our estimate, assuming as a base-case that a RM2bn payment is settled via land swap, this would value the STP2 land at RM417 psf, higher than our conservative market value assumption of RM330 psf in our RNAV estimate. The GDV of STP2 will therefore be boosted. More importantly, by owning 760 acres of seafront land, E&O will strategically be the property price leader in the Penang island market in future.
  
  
• STP2 kicking off post election.  We think the whole process will beaccelerated after the general election. Reclamation works can be kicked off by end 2013. A public forum will be called in tandem with the revelation of the development plan after the poll. Minor adjustments will be made for the final plan after collecting public feedback.
  
  
• Key risks and concerns.  i) delays in approvals and launches; ii) downside inglobal economic growth; and (iii) natural disaster that may disrupt reclamation work at STP2 once it is started. 
  
  
• Earnings growth.Unchanged.  
  
• Valuations. We maintain our Trading Buy call on E&O, with an unchanged fairvalue of RM2.08 at 40% discount to RNAV. While investors’ sentiment over the short term could be negatively affected by the election risk, E&O is worth a closer look once the overhang is clear, given its upcoming catalysts as well as improving fundamentals.