What’s next for E&O?

Massive project: An artist’s impression of the proposed STP2 project. It is E&O’s impressive seafront development along Penang’s northeast coast between George Town and the beaches of Batu Ferringhi.

Largest shareholder Tham to manage the group’s gearing

THE last time high-end property developer Eastern & Oriental (E&O) Bhd made the news in a big way was in 2011 when a block of shares in the company was sold to Sime Darby Bhd, at a price that suprised the market.

E&O became a hot topic of discussion at the time due to the huge premium of close to 60% to market paid by Sime for a 30% stake in the company.

This week, another significant shareholding change took place.

This time, it is the group’s managing director Datuk Seri Terry Tham who is dishing out a big premium to “buy back” his company from the conglomerate.

On June 3, Tham inked a deal to fork out RM342mil for 10% of E&O at RM2.60 per share, which translates to a premium of 64% to the stock’s last closing price of RM1.59, in deal expected to be completed in the next three months.

This is a second tranch of shares he is buying back from Sime, having paid RM319mil for 9.9% or 110 million shares at RM2.90 per share in 2014.

With these transactions, Tham will emerge as the company’s largest shareholder with a 21% interest, while Sime will be left with a 12.2% stake.

With Tham having committed to fork out a total of RM661mil to gain a stronger holding of the company, the question is, what does this mean for E&O?

Tham says among his priorities going forward is managing the group’s gearing.

“While remaining focused on implementing our development projects including Seri Tanjung Pinang Phase 2 (STP2), I want to exercise discipline in maintaining a healthy cashflow with prudent gearing management to enhance shareholders’ return,” he says.

STP2 is E&O’s massive seafront development along Penang’s northeast coast between George Town and the beaches of Batu Ferringhi.

E&O has about RM1.5bil in loans and borrowings, according to the report for its first quarter ended March 31, 2016.

Tham tells StarBizWeek that the RM319mil acquisition he made in 2014 was done largely through bank financing.

“I am hoping to fund the current acquisition through similar means,” he says.

Asked if E&O is planning to raise capital in the near future, the group’s finance director Kok Meng Chow says: “Should the need arise, we are always flexible to explore the possible fund raising programmes that may be appropriate to our needs at that point in time.”

Another move that the company had taken to pare down gearing was the planned listing of its unit, Eastern & Oriental Plc, on the London Stock Exchange.

However, this the group recently announced that this plan was terminated.

“The rationale for the listing was that we wanted to pare down E&O’s gearing, especially in light of imminent funding requirements to operationalise STP2.

“As listing plans have been terminated, the company shall be exploring various other feasible options to achieve the same objective,” says Kok.

According to industry sources, it is very likely that Tham’s decision to return to E&O was sparked by Sime’s need to monetise its assets, which in turn meant that the E&O block would be up for sale.

Sources say Tham grabbed the opportunity to take up the block as he sees value in the company.

Sime also looks good following the deal, having made gains on disposals in both the 2014 and latest sale to Tham.

It sold the 9.9% stake in 2014 at 28% higher than its average cost, and saw a gain for RM56mil.

In the latest deal, the conglomerate is selling at RM2.60 per share, which translates to a premium of 64% to the stock’s last closing price of RM1.59.

It is also 27% higher than the company’s average investment cost of RM2.05 per share in E&O in 2011.

Another interesting development this week is that Singapore’s GK Goh Holdings Ltd is also seen increasing its shares in E&O, following Tham latest acquisition.

On Wednesday, 700,000 shares were acquired by GKG Investment Holdings Pte Ltd and GK Goh Holdings Ltd.

The Singaporean company was among the three major shareholders along with Tham and Tan Sri Wan Azmi Wan Hamzah who sold the 30% block of shares to Sime in 2011. GK Goh had been left with 2.9% stake after the sale.

E&O’s share price, however, has not seen much movement since the announcement on June 3, moving up about 11 sen, and closing at RM1.70 yesterday.

E&O has a market capitalisation RM2.13bil.

Analysts say they view the latest acquisition by Tham as a long-term positive to E&O as it reflects key management personnel’s continued conviction and confidence in the group’s long term value.

“The increase in Tham’s stake in E&O should strengthen investors’ confidence in the long-term growth prospect for E&O especially with the all-important STP2 project underway,” a research house points out.

The research house maintains its earnings forecasts for FY17 and FY18 and its “neutral” call on the group with a target price of RM1.60 per share.

However, it says it will keep its steep discount of 65% to RNAV due to E&O’s high net gearing.