E&O core earnings outlook raised on interest savings

PETALING JAYA: Eastern & Oriental Bhd’s (E&O) core earnings projection have been raised on the back of significant interest savings following the conversion of its loan stocks into ordinary shares.

Research house Kenanga Research raised E&O’s core earnings projection for the financial year ending March 31, 2012 (FY12) and FY13 by 8% to 16% respectively as the loan stocks carried a hefty coupon interest rate of 8% per annum.

In terms of share base, post conversion of its loan stocks, E&O’s share base will grow by 22% while market capitalisation will also be up by the same amount.

Following this, some share overhang is expected in the short term which may weaken the property company’s share price performance.

At the close, E&O’s stock was down 2 sen to RM1.39.

Kenanga Research noted that its targeted FY12 shareholder funds would also increase by 6% after this exercise, with corresponding net gearing improving to 0.3 times from 0.4 times.

This would provide room for further gearing, especially if E&O and potentially Sime Darby Bhd (which recently bought a 30% stake in the company) embarked on the capital intensive reclamation project of Seri Tanjung Pinang 2, it said.

For E&O, pundits argue that the key selling point is its 980-acre Seri Tanjung Pinang seafront development with an estimated gross development value of RM10bil in Penang.

E&O holds the concession to reclaim 740 acres for the second phase of the project in Tanjung Tokong to create two islands for mixed development.

Meanwhile, in view of the share overhang, which is likely to lead to a weakness in E&O’s share price, industry observers said this would make Sime Darby’s purchase of the 30% stake come in at a greater premium.

Sime Darby’s offer price was RM2.30 per E&O share which translates to a staggering 60% premium to its then market price. - The Star