E&O upbeat on new UK properties (Update)


EASTERN & Oriental Holdings Bhd (E&O) will leverage on its UK properties, with a combined gross development value (GDV) of up to £400mil, to expand its presence there.

E&O now has a platform to expand after its purchase of two office buildings in London – the 11-storey Thames Towers and 15-storey Landmark House – for £57mil (RM308.94mil) in January.

E&O deputy managing director Eric Chan Kok Leong says with the two buildings in addition to the two current properties of Princes House and Esca House in the UK, the base case of the combined GDV would be from £270mil to £400mil.

Currently, the GDV of Princes House is RM325mil (£60mil) and Esca House RM434mil (£80mil). Chan says the latest acquisitions of Thames Towers and Landmark House represent a sizeable project that will anchor E&O’s portfolio.

These projects will provide it a scale that is significant to attract a separate and dedicated London management team fully focused on building the E&O brand and properties abroad.

An artist’s rendering of the STP2 project, which is expected to stretch over 15 to 20 years comprising mixed development of residential and commercial components.

An artist’s rendering of the STP2 project, which is expected to stretch over 15 to 20 years comprising mixed development of residential and commercial components.

“The formation of this E&O Property UK team is imminent and would be the platform in which current and future projects in London would be managed and spearheaded, and could be potentially achieved through strategic partnerships and/or through a listed entity in the UK within the next 12 months,” he told StarBizWeek.

Chan says the assets in the United Kingdom would be the platform to attract the talent who will have a sizeable project to work on. It can then work with the strategic partners, via a joint venture (JV) that would be formed.

There will be 30% equity and 70% bank financing for the platform.

“E&O has insofar come up with £32mil, 30% of the equity value for all three assets. The first priority is to establish a team to manage the projects within the platform,” he added.

UK-listed entity

A JV plan, according to RHB Research, is a good move as it would allow E&O to reduce its gearing while holding an associate stake in the JV, but retaining a “significant influence” on the board.

AmResearch, meanwhile says the platform will transfer E&O’s debts arising from London to a UK-listed entity or JV. According to the research firm, any future acquisitions in London could be done via this platform.

Commenting on analysts’ initial concerns that E&O’s gearing might rise, Chan says: “Our gearing is at 0.3 times. With the acquisitions, it would be 0.5 times, which is still conservative.”

Chan: ‘The UK team is imminent and will be the platform in which current and future projects in London will be managed .and spearheaded.’
Chan: ‘The UK team is imminent and will be the platform in which current and future projects in London will be managed .and spearheaded.’

He explains that with the rental income at 70% occupancy, it is sufficient to service the loan for the acquisition. The buildings can also be refurbished or redeveloped and maintained as office buildings due to the fairly strong demand.

On yields, it can expect a 7% to 8% net yield, he adds.

UK is one of E&O’s four growth engines, besides Greater Klang Valley, Penang and Iskandar Malaysia.

As for earnings outlook, Chan is confident the company can register sustainable after-tax profit for the next three year and after. Cumulative after-tax profit for the period of 2014 to 2016 should come in the region of RM450mil and if it does better, Chan expects it can stretch to RM500mil.

E&O’s unbilled sales stood at RM831mil as at Sept 30, 2014, while cash and cash equivalent amounted RM224mil.

Seri Tanjung Pinang 2

Giving an update on its Penang project, Chan says in January it had its first regional launch in Taiwan for the exclusive condominium project – the 18 East at Andaman that is being developed at Seri Tanjung Pinang (STP), Penang.

“Over 200 people expressed interest in the 18 East at Andaman at the Taipei launch. These interested buyers were looking at the bigger units, which were the two to three bedrooms and facing the sea.”

E&O recently got the nod start land reclamation works for Phase 2 of Seri Tanjung Pinang (STP2).


STP2 is expected to stretch over 15 to 20 years comprising mixed development of residential and commercial components. Analysts estimated that STP2’s total cost to be RM2.8bil and gross land cost at RM94 per sq ft (net land cost at RM133 per sq ft). STP2, covering 760 acres is touted as a rerating cataylst for E&O shares.

Chan says the advantage with reclamation is that E&O will have a clean slate to undertake the master planning. “The development of STP2 is long term and as long as Penang continues to grow, there will be a need for land resources,” he adds.

E&O has prequalified the contractors for the project and it is now undertaking the due diligence.

It has opened the tenders for the reclamation in January and expects to close the tenders by end-February and award the jobs by the first half of 2015.

“As for the total reclamation cost, this will be from the tenders provided by the contractors,” he says.

Also the Securities Commission and E&O’s shareholders have approved the RM500mil convertible medium-term notes (MTN) programme.

“We have not issued it as yet as it depends on its cashflow requirement. We expect the notes to be fully taken up. The coupon is 2%. They are convertible into shares at RM5 per share.

The MTN will cover the initial preliminary and infrastructure works and the balance will be covered by completion bank guarantees.


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Below is the full story

KUALA LUMPUR: Eastern & Oriental Holdings Bhd (E&O) will leverage on its UK properties, with a combined gross development value (GDV) of possibly up to £400mil, to expand its presence there.
E&O now has a platform to expand after its purchase of two office buildings in London -- the 11-storey Thames Towers and 15-storey Landmark House -- for £57mil (RM308.94mil) in January. 
E&O deputy managing director Eric Chan Kok Leong said with the two buildings in addition to the two current properties of Princes House and Esca House in the UK, the base case of the combined GDV would be from £270mil to £400mil.
Currently, the GDV of Princes House is RM325mil (£60mil) and Esca House RM434mil (£80mil). Chan adds the latest acquisitions of Thames Towers and Landmark House represent a sizeable project that will anchor E&O’s portfolio.
He adds this will provide it a scale that is significant to attract a separate and dedicated London management ream fully focus on building the E&O brand and properties abroad.
“The formation of this E&O Property UK team is imminent and will be the platform in which current and future projects in London will be managed and spearheaded, and could be potentially achieved through strategic partnerships and/or through a listed entity in the UK within the next 12 months,” he says in an interview with StarBiz.
Chan added the assets in the UK would be the platform to attract the talent who will have a sizeable project to work on. It can then work with the strategic partners.
There would be 30% equity and 70% bank financing for the platform. 
“E&O has insofar came up with £32mil, 30% of the equity value for all three assets. The first priority is to establish a team to manage the projects within the platform,” he adds.
The platform would be in the form of a joint venture company (JV) where E&O will work with strategic partners for future development.
RHB Research views this JV plan as a good move as it would allow E&O to reduce its gearing while holding an associate stake in JV but retains a “significant influence” in the board.
AmResearch said the  platform would transfer all E&O’s debts arising from the London to a UK-listed entity or JV. Any future acquisitions in London would be undertaken by this new platform.
Indeed, analysts have become more positive about the purchase of Thames Towers and storey Landmark House.
Chan said the analysts’ initial concerns were that E&O’s gearing would go up. 
“As a company, our gearing is at 0.3 times and with this acquisition, it is 0.5 times, and this is still conservative,” Chan explains. “Even today, with the rental income at 70% occupancy, it is sufficient to service the loan for the acquisition.”
These two buildings can be refurbished or redeveloped and maintained as an office building due to the fairly strong demand. 
“Even with the short tenancies, if we redevelop these buildings as office buildings, as base case under the advice of our London consultants, it can easily be tenanted out. 
“We can expect 7% to 8% net yield. The best case scenario is that we can ask for redevelopment to increase density with residential mix and then the acquisition costs will be reduced.
“The potential of mixed yield is quite viable or realistic. The architects have done some checking with council and it is possible to redevelop. As for the plot ratio, it is under three times today, and it has room for increase in density,” he adds. 
For the lifestyle property development group, UK is one of the four growth engines, including Greater Klang Valley, Penang and Iskandar Malaysia.
As of now, E&O has joint ventures with strategic investors including Sime Darby Group Bhd, Mitsui Fudosan and Temasek Holdings. The group, he adds, is also pursuing additional international partnerships and operations collaborations.
As for its earnings outlook, he said the group has a sustainable profit after tax for the next three year and beyond. 
E&O’s initial target in 2011 to 2013 was RM250mil but it achieved RM262.6mil. The next growth and developments from 2014 to 2016 would be a cumulative profit after tax (PAT) is RM450mil and if it does very well, Chan expects it can stretch to RM500mil. 
As for post FY2016, E&O will focus on sustainable GDV and PAT per annum.
“We have a strong balance sheet which provides a stable platform to support the group’s future growth.
“At March 31, 2013, E&O’s cash and cash equivalent stands at RM277.16mil and at Sept 30, 2014, it was RM224mil. Our net gearing was 0.297 times at March 31, 2013 and 0.304 times at Sept 30, 2014.
“We have unbilled sales of RM831mil as at Sept 30, 2014.
“As for our business plan 2014-2016, we will continue to maintain manageable gearing levels, improve value for shareholders with increased net asset per share and reaffirm our PAT commitment for FYE2014 to FYE2016 of RM450mil to RM500mil,” he stresses. 
As for its Penang projects, E&O had in January embarked on its first regional launch in Taiwan for its exclusive condominium project – the 18 East at Andaman – which is being developed at Seri Tanjung Pinang (STP) on Penang island.
Chan adds there were over 200 persons who expressed interest in the 18 East at Andaman at the Taipei launch. He adds these interested buyers had flown in from Taiwan and most of them were looking at the bigger units, which were the two to three bedrooms and facing the sea.
Another re-rating catalyst for E&O is the Second Phase of Seri Tanjung Pinang (STP2) on Penang island, he said this would cover 760 acres. 
E&O has prequalified the contractors and it is now undertaking the due diligence.
It had opened the tenders for the reclamation in January and expects to close the tenders by end-February and award by the first half of 2015.
“As for the total reclamation cost, this will be from the tenders provided by the contractors,” he says.
As for the overall development of STP2, it will stretch over 15 to 20 years. The mixed development will have residential, commercial components with 12,000 homes. 
AmResearch estimates STP2’s total cost to be RM2.8bil and gross land cost at RM94 per sq ft (net land cost at RM133 psf). 
The research house does not expect the reclamation to significantly impact E&O’s balance sheet as the funding is through banker’s guarantee, which will be converted into a term loan over seven years once the land title is issued. 
Also the Securities Commission and E&O’s shareholders have approved the RM500mil convertible medium term notes (MTN) programme. 
“We have not issued it as yet as it depends on its cash flow requirement. We expect the notes to be fully taken up. The coupon is 2%. They are convertible into shares at RM5 per share. 
The MTN will cover the initial preliminary and infrastructure works and the balance will be covered by completion bank guarantees.
Chan says the advantage with reclamation is that E&O will have a clean slate to undertake the master planning.
“For STP2, development is a long term thing, as long as Penang continues to grow, there will be a need for land resources,” he adds.


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