Tanjong: Good bet for more gains

Tanjong: Good bet for more gains

Tags: InsiderAsia | Tanjong plc

Written by InsiderAsia
Thursday, 08 October 2009 16:10



THERE are growing concerns that the rally in global stocks has been too fast and has run ahead of underlying fundamentals. For instance, the current average price-to-earnings (P/E) valuation of roughly 17-18 times 2009 earnings for the local bourse does appear stretched.

While stock markets have remained very resilient so far, we may be in for a period of consolidation — pending more concrete evidence of a sustainable global economic recovery. That is not to say no gains can be made. But with the low-hanging fruits picked, investors would have to be more selective.

Very attractive valuations
Tanjong plc (RM15.50), we believe, is one good bet for further upside gains from hereon.
Its shares are trading at only 9.5 times our estimated earnings of 163.2 sen per share for the financial year ending January 2010 — making it one of the most attractively valued big-cap, blue-chip stocks currently listed on Bursa Malaysia.

At the same time, the stock also pays attractive dividends. We estimate dividends per share to total RM1 for the current financial year. That will earn shareholders a gross yield of 6.5% — well above prevailing bank deposit rates and the broader market's average yield.
We foresee limited earnings downside risks for the company given that Tanjong's key businesses are relatively defensive in nature.

Sustainable power earnings, upside from new acquisitions
Power is the largest earnings generator. The business accounted for about 79% of Tanjong's earnings before interest and taxes (EBIT) in 1HFY10.
Contributions from the local power assets recovered from the various one-off expenses, including major maintenance, unscheduled outages and development costs writeoffs incurred in the previous corresponding period.

Meanwhile, earnings from Tanjong's power-generating subsidiaries in Egypt and Bangladesh expanded at a steady and sustainable pace, accounting for more than half of total EBIT for the power arm. Pre-tax profit for its power-related associates was also higher at RM37 million in 1HFY10, up from RM28.4 million in 1HFY09.
We do not expect any material variation in 2HFY10. Looking further ahead, its power earnings are sustainable — with the additional upside potential from new acquisitions.

Solid NFO franchise
Luck continued to favour Tanjong's numbers totalisator business (NFO) in 2QFY10. Prize payout in the latest quarter averaged at just about 61.1%, slightly lower than the 62.5% in 1QFY10. By comparison, prize payout averaged around 65% in 1HFY09.

The lower prize payout translated into another good quarterly earnings for the company. EBIT totalled RM156.8 million in 1HFY10 compared to RM123 million in 1HFY09 — despite weaker turnover per draw, which fell by about 3.3% during the period, likely due to a combination of factors including weaker consumer spending, greater number of draws and the rise in illegal betting.

Outlook for the NFO franchise remains positive. But earnings in 2HFY10 may be lower than that in the first half of the financial year, where prize payout has averaged below the more typical 64%-65% ratio.
Good earnings from the NFO arm offset losses for its other gaming unit, the racing totalisator (RTO) business. The company is working to reduce expenses and pare losses but the unit will stay in the red in the foreseeable future.

Earnings from the power and gaming businesses are fairly steady and predictable, as are those from the property and TGV cinemas businesses. As such, the biggest concern for investors is probably Tropical Island.

Tropical Island's losses not material
The resort is likely to stay in the red until plans to develop onsite accommodation come to fruition. Those plans were delayed by the global downturn and tight credit market conditions. The first phase, to build up to 425 villas and related facilities, is now slated for completion by end-2011.
Nonetheless, losses have been pared down substantially with improved cost controls and management, as well as the successful implementation of additional facilities within the resort over the past two years.

Losses before interest and tax (LBIT) narrowed to just RM4.3 million in 1HFY10 compared to RM15.5 million in the previous corresponding period. We estimate losses in the region of RM16 million for the full year. To place that into perspective, Tropical Island's losses are marginal compared to Tanjong's estimated EBIT of RM1.26 billion in FY10.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.