gsg_stock discussion

Stockwatch- E&O Property (Malaysia) Citigroup Maintain BUY, 2Q In Line, Raising FY08-09E Forecasts and Target Price from RM1.80 to RM2.00

E & O Property Development Bhd (EOPD.KL)
29 November 2006
Buy: 2Q In Line. Raising FY08-09E Forecasts and Target Price

2Q in line, stronger performance ahead — 2Q net profit of RM21m lifted net profit to RM41m (+97% YoY), helped by earnings recognition from high-margin projects (EBIT margins expanded 2.8pp to 17.5%) such as Dua Residency, Idamansara & Seri Tanjung Pinang. 1H07E net profit accounted for 44% of our full-year estimates but we expect stronger 2H, boosted by gains from its land disposal at Seri Tanjung Pinang (estimated at RM15m).
Raising forecast and target price — We have raised FY08-09E net profit by up to 10% to factor in higher margins and sales volume. Hence, we raised our P/Ebased target price 11% to RM2.00, offering an attractive 21% ETR. FY08E P/E of 8x looks attractive against 26% 3-year EPS CAGR, backed by RM299m in unbilled sales.
Leading position in growth markets — The group’s strategy is to focus on welllocated landbank and leveraging on its strong branding and track record. ENOP is well-regarded for its innovative designs and lifestyle products that complement the excellent location of its projects in Klang Valley and Penang.
Prime developments — ENOP has a residual landbank of 1,701 acres in prime locations around Klang Valley and Penang. This would easily sustain its development efforts over the next 10-15 years.
Catalysts — Possible catalysts to drive the share price closer to our target price include: (1) more land transactions at higher prices in Penang, (2) strong demand for new launches in Penang and Klang Valley, (3) better-than-expected earnings.

Investment thesis
We have a Buy/Medium Risk (1/M) rating on ENOP, a well-regarded Malaysian developer that focuses on developments in prime locations in the Klang Valley and Penang. The group's strong branding, through its association with the E&O Hotel and a good track record with innovative projects, positions it well for firm demand for premium residential development.

Valuation
Based on a target PE of 10x, we arrive at a target price of RM2.00/share. Our P/E benchmark values ENOP on a similar basis to Mah Sing (MAHS.KL - RM3.44; 1L). We believe the comparable valuations are reasonable since these are two small cap companies that strong growth profiles and manageable debt.

Our secondary valuation is based on a 10% discount to RNAV of RM2.23/share. This suggests a fair value of RM2.00/share. We believe a small 10% discount is justified since: 1) We expect property prices in Penang to appreciate. Penang properties account for 71% of its RNAV, 2) The group's landbank in Klang Valley is strategically located allowing management to develop these properties quickly, 3) We believe demand risk, particularly for its Klang Valley projects, is contained given its strategy of focusing on urban areas (15km radius from city centre) where demand is resilient. In addition, these projects would benefit from spillover demand from the established developments.

Risk
We have a Medium Risk rating on the stock based on our quantitative risk rating system, which tracks 260-day historical share price volatility. In our view, some of the key risks that could prevent the share price from reaching our RM2.00 target price include:

1) An unfavorable macro economic environment, which would affect upgrading demand and sales of premium housing project, a segment to which ENOP has significant exposure
2) Regulatory risk as longterm demand for its Penang project is contingent on favorable regulations for foreign buyers
3) Corporate restructuring risk. Being part of a conglomerate (E&O Berhad) (ENOB.KL - RM1.39; NR), there is always risk of possible changes and restructuring of its holding company, which might have implications for ENOP 4) Delays in securing approvals for landbank.

posted by gsg @ 10:24 AM