Tanjong plc
(April 13, RM18.52)
Downgrade to market perform at RM18.50, with unchanged target price of RM19.20: The next leg of growth for the power division would depend on acquisitions, and the management had previously expressed a target of doubling its current power capacity to 8,000MW over the next four to five years.
This could include greenfield and/or brownfield projects with particular focus on regions such as South Asia, Southeast Asia, the Middle East and North Africa.
According to the management, globally, the power industry appears to be showing signs of recovery from the economic crisis and greenfield projects that were previously deferred are now seeing a return. Tanjong's preference is for greenfield projects and the management has a target internal rate of return (IRR) of low-mid teens for greenfield projects in emerging markets.
While we understand Tanjong could launch a new jackpot game later this year, not much details are known at the moment. Nevertheless, we believe the game would likely be similar to BToto's jackpot games. Assuming the new game brings in around RM1 million in sales per draw, we estimate a full-year impact could lift our earnings projections by around 2%.
As for the racing totalisator (RTO) segment, while the management continues to work towards a resolution to the escalating expenses, the message we took away was that this would take time. In our model, we have assumed operating losses of RM60 million per annum for FY11-FY13.
For Tropical Islands (TI), visitor arrivals and the average revenue per unit have been trending up while the construction of accommodation (19 homes built and sold thus far) should further help address the challenge of low weekday visitor attendances and short-stay visitors.
As for Tanjong Golden Village (TGV), we expect its FY10 operating profit contribution of RM14.8 million to hold steady going forward.
While Tanjong does not have a specific dividend policy, we understand that dividends going forward should not be lower than FY10's gross dividend per share (DPS) of RM1. We project FY11-FY13 gross DPS of RM1.02-RM1.06, which translates to net dividend yields of 4.1%-4.3%.
The risks to our recommendations are: (1) the stronger ringgit/US dollar rate would impact overseas power profits; (2) higher-than-expected numbers forecast operator (NFO) prize payout; (3) sovereign risk of overseas power projects; (4) change in landscape under the National Energy Plan; and (5) high foreign shareholding (38.5% as at end-Feb).
There is no change to our forecasts for now.
Our sum-of-parts-derived (SOP) fair value of RM19.20 is unchanged. Tanjong's strong share price performance means that the gap to our SOP valuation has narrowed significantly and the stock's total potential return of 8% is roughly in line with our expected market return. Consequently, we have downgraded our recommendation to market perform from outperform.
In our view, Tanjong stands a strong chance in securing some of the new power projects, which we believe would be value accretive. Our SOP valuation does not reflect such additions and hence, we see upside potential to our fair value if Tanjong is successful with its bids. - RHB Research Institute, April 13
This article appeared in The Edge Financial Daily, April 14, 2010.
(April 13, RM18.52)
Downgrade to market perform at RM18.50, with unchanged target price of RM19.20: The next leg of growth for the power division would depend on acquisitions, and the management had previously expressed a target of doubling its current power capacity to 8,000MW over the next four to five years.
This could include greenfield and/or brownfield projects with particular focus on regions such as South Asia, Southeast Asia, the Middle East and North Africa.
According to the management, globally, the power industry appears to be showing signs of recovery from the economic crisis and greenfield projects that were previously deferred are now seeing a return. Tanjong's preference is for greenfield projects and the management has a target internal rate of return (IRR) of low-mid teens for greenfield projects in emerging markets.
While we understand Tanjong could launch a new jackpot game later this year, not much details are known at the moment. Nevertheless, we believe the game would likely be similar to BToto's jackpot games. Assuming the new game brings in around RM1 million in sales per draw, we estimate a full-year impact could lift our earnings projections by around 2%.
As for the racing totalisator (RTO) segment, while the management continues to work towards a resolution to the escalating expenses, the message we took away was that this would take time. In our model, we have assumed operating losses of RM60 million per annum for FY11-FY13.
For Tropical Islands (TI), visitor arrivals and the average revenue per unit have been trending up while the construction of accommodation (19 homes built and sold thus far) should further help address the challenge of low weekday visitor attendances and short-stay visitors.
As for Tanjong Golden Village (TGV), we expect its FY10 operating profit contribution of RM14.8 million to hold steady going forward.
While Tanjong does not have a specific dividend policy, we understand that dividends going forward should not be lower than FY10's gross dividend per share (DPS) of RM1. We project FY11-FY13 gross DPS of RM1.02-RM1.06, which translates to net dividend yields of 4.1%-4.3%.
The risks to our recommendations are: (1) the stronger ringgit/US dollar rate would impact overseas power profits; (2) higher-than-expected numbers forecast operator (NFO) prize payout; (3) sovereign risk of overseas power projects; (4) change in landscape under the National Energy Plan; and (5) high foreign shareholding (38.5% as at end-Feb).
There is no change to our forecasts for now.
Our sum-of-parts-derived (SOP) fair value of RM19.20 is unchanged. Tanjong's strong share price performance means that the gap to our SOP valuation has narrowed significantly and the stock's total potential return of 8% is roughly in line with our expected market return. Consequently, we have downgraded our recommendation to market perform from outperform.
In our view, Tanjong stands a strong chance in securing some of the new power projects, which we believe would be value accretive. Our SOP valuation does not reflect such additions and hence, we see upside potential to our fair value if Tanjong is successful with its bids. - RHB Research Institute, April 13
This article appeared in The Edge Financial Daily, April 14, 2010.
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