KUCHING: Eastern & Oriental Bhd’s (E&O) Lone Pine Hotel disposal has been viewed positively by analysts as this will strengthen the group’s balance sheet via realising cash resources.
In a filing on Bursa Malaysia, E&O’s board of directors announced that wholly-owned Eastern & Oriental Hotel Sdn Bhd has entered into a share sale agreement with Langkawi Saga Shopping Centre Sdn Bhd and Lubritrade Trading Pte Ltd for the disposal of all its 10 million ordinary shares of RM1 each and 41,500 preference shares of RM0.10 each in E&O Express Sdn Bhd (EOE), representing its entire shareholding interest in EOE for a total consideration of RM85 million.
EOE is currently the owner of the Lone Pine Hotel and the legal and beneficial owner of that piece of land on which the hotel was built upon. The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) viewed the disposal positively as the disposal could help reduce net gearing of E&O to 0.68-fold from 0.71-fold as of March 2017.
The research arm of Public Investment Bank Bhd (PublicInvest Research) was also positive on the asset sale as this will strengthen the group’s balance sheet via realising cash resources which can then be deployed into identified projects and investments to maximise returns. PublicInvest Research has kept its earnings estimates unchanged for now pending completion of the deal.
According to MIDF Research, loss of earnings contribution from Lone Pine Hotel is expected to be minimal as hospitality division of E&O only contributed 2.8 per cent to total operating profit in financial year 2017 (FY17).
“Meanwhile, E&O is expected to realise an estimated disposal gain of RM23.3 million from disposal of Lone Pine Hotel,” the research arm said.
“Besides, annual interest saving is estimated at RM4.6 million per annum assuming E&O uses the proceeds from disposal entirely to pare down borrowings.”
MIDF Research estimated the disposal gain and interest saving would potentially lift FY18 earnings by 24.9 per cent.
Nevertheless, the research arm also maintained its earnings forecast pending completion of the disposal.
On a side note, PublicInvest Research believed that E&O has certain other non-core assets that could be disposed such as Straits Quay Retail and non-strategic landbank such as the group’s 0.9-acre land at Jalan Liew Weng Chee (off Jalan Yap Kwan Seng) that has a market value of circa RM55 million.
“If the price is right, we believe that it will also offload its overseas undeveloped landbank,” the research arm said.
As such, PublicInvest Research maintained ‘neutral’ and its target price of RM2.00 per share, pegged at 50 per cent discount to revalued net asset valuation (RNAV).
Meanwhile, MIDF Research maintained its ‘buy’ call on E&O with unchanged target price of RM2.68 per share, based on 55 per cent discount to RNAV.
The research arm was positive on the long-term prospect for E&O following the entry of the Retirement Fund Incorporated (KWAP) as strategic investor of Seri Tanjung Pinang 2A (STP2A) which helps to unlock the value of STP2 project.
“Besides, the entry of KWAP and the assets monetisation of E&O would help to keep net gearing of E&O in check,” it said.