JV frees up E&O’s cash flow

by **Cals** Fri 22 Mar 2013, 14:33

JV frees up E&O’s cash flow
Business & Markets 2013
Written by theedgemalaysia.com
Friday, 22 March 2013 14:00

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Eastern & Oriental Bhd
(March 21, RM1.61)

Maintain buy at RM1.55, with a target price of RM1.91: Eastern & Oriental Bhd (E&O) is entering into a joint venture agreement with Mitsui Fudosan Residential Co Ltd (Mitsui Residential), one of Japan’s largest developers, to develop The Mews Serviced Residences in Kuala Lumpur.

The collaboration is a step up from E&O’s existing partnership with Mitsui. In 2011, E&O signed a marketing collaboration agreement with Mitsui Fudosan Realty Co Ltd to market E&O PROPERTIES [] to Mitsui’s high net worth clientele in Japan. Currently Japanese buyers are the second largest segment in E&O’s foreign buyer profile.

Mitsui Residential is a wholly-owned subsidiary of Mitsui Fudosan Co Ltd, Japan’s largest property company by revenue from operations, which recorded revenue of ¥1.338 trillion (RM43.6 billion) in 2012 financial year (FY12).

Mitsui is listed on the Tokyo Stock Exchange and as at March 31, 2012 its total assets stood at ¥3.78 trillion while its market capitalisation was at ¥1.40 trillion.
The Mews sits on 1.21 acres of freehold land in Jalan Yap Kwan Seng. Comprising 256 serviced apartments housed in two 38-storey towers, the development is expected to commence in the second quarter of 2013.

Previously it was reported that the selling price for the development is around RM1,450 psf while the total gross development value (GDV) for the project is RM400 million.

Mitsui will purchase 2.45 million ordinary shares, representing 49% of the issued and paid-up capital of the holding company for the plot of land, for a cash consideration of RM41.3 million.

E&O group will realise an estimated one-off gain of RM3.45 million from the disposal. Apart from that, we are revising FY14 to FY15 earnings downward by 3% and 8% respectively, reflecting lower earnings contribution from The Mews.

We are positive on the JV as E&O will be able to free up its cash flow for other developments while diluting the project’s risks. In addition, E&O could explore the possibility of more joint venture projects with Mitsui. We are maintaining our “buy” recommendation for E&O with a target price of RM1.91 by ascribing a discount of 20% against its realisable net asset value (RNAV). — MIDF Research, March 21

This article first appeared in The Edge Financial Daily, on March 22, 2013.