New power projects will drive Tanjong's growth

Written by InsiderAsia
Tuesday, 06 April 2010 16:02


TANJONG plc (RM18.82) is looking to new power projects to drive growth for the company for the foreseeable future.

The company has had a good start in terms of overseas expansion, successfully acquiring power plants with effective installed capacity totalling some 2,461MW over the past few years.


Its biggest investments are currently in generating plants in Egypt and Bangladesh with smaller interests in Pakistan, Sri Lanka and the United Arab Emirates. Having already established a track record in these countries, Tanjong is upbeat on its ability to secure new power projects, especially in the Middle East and North Africa (MENA) region.

Focus on MENA power projects
The MENA region has vast reserves of petroleum and natural gas with a population equivalent to that of the European Union. Electricity demand growth expectations and investment requirements in the power and power/water sector in the region is one of the highest in the world, particularly for members of the Gulf Cooperation Council.

Against this background, Tanjong has aspirations to add some 4,000MW to its power-generating portfolio over the next five years. The company has a relatively strong balance sheet to leverage upon. Its existing power plants generates a cumulative RM1 billion in cashflow annually while the company has over RM1.5 billion in gross cash, some RM1.3 billion of which lies with the power business.

The power arm accounted for over three-quarters of Tanjong's pre-tax profit of RM953.3 million in its latest financial year ended January 2010. Not taking into account any new acquisitions, we expect the business to record steady earnings in FY11 — save for some RM50 million budgeted for major overhaul expenses for two of its power plants.

In short, power will continue to be the largest earnings contributor and key driver for future growth.

Sustained performances from property and leisure
Elsewhere, the property and leisure businesses are expected to sustain earnings in FY11.

The property arm, mainly rental income from Menara Maxis, contributed some RM48 million in FY10, excluding RM22 million in revaluation gains. The building is fully occupied and few surprises are expected on the earnings front.


Similarly, TGV Cinemas is expected to maintain its performance this year. The unit reported operating profit of RM14.8 million in FY10.

Tropical Islands will probably stay in the red but with slightly narrower losses. The resort theme park recorded RM22.7 million in operating losses in FY10, down from losses totalling RM33.9 million in the previous financial year.

Nonetheless, any significant turnaround is likely only possible once more on-site accommodations are available. Tanjong's venture partner has completed 21 villas so far and aims to have another 25 units available by mid-2010. The company targets some 400 units by the end of 2012. On-site accommodation is key to attracting a greater number of visitors from a wider geographical range. Currently, most visitors are day-trippers. Longer stay would also boost the average visitor spending in the resort.

Working to resolve RTO losses
Less positively, operating losses at the racing totalisator (RTO) business widened in FY10, to RM65.8 million from a loss of RM26.9 million in the previous year. Losses may increase further in the current financial year as the company works to resolve issues plaguing the business.

Sales per draw at the numbers forecast business (NFO) too have contracted in FY10. We believe this was due, in part, to the higher number and timing of special draws as well as competition from new games recently introduced by its peers.

Given that another 20 special draws are slated for the current year, the same as that in FY10, sales would probably stay flattish. Operating profit will be dependent on the luck factor and prize payout, which tends to average out at around 65%-66%.

In all, we forecast earnings from the gaming business to decline in FY11, weighed down by bigger losses — estimated at about RM80 million — for the RTO unit.

Still good investment for the longer term
Thus, in the absence for any extraordinary gains/losses, we expect lower profits in the current financial year for Tanjong. Net profit is estimated at roughly RM636.4 million or 157.8 sen per share, down from RM676.8 million in FY10.

Despite the expected earnings contraction this year, we believe the stock is still a good longer-term investment — priced at just about 11.9 times price-to-earnings (P/E) — with better than fair prospects for growth. A new power project would result in a step increase in its earnings base, which would then be sustainable over the period of the power purchase agreement.

Furthermore, Tanjong should be able to sustain its dividend payments, at least, supported by steady cashflow from the NFO business. Assuming gross dividends remain at RM1 per share, shareholders will earn a fairly decent yield of 5.3% at the current share price.