Stock Name: TGOFFS
Company Name: TANJUNG OFFSHORE BHD
Research House: MAYBANK
Tanjung Offshore Bhd
(April 27, RM1.29)
Maintain sell at RM1.39 with target price of RM1.07: We maintain our 'sell' call as 1QFY11 earnings will likely miss street expectations again. Cost management strategies and operating prospects remain the key concerns. An equity cash-call could ensue should the cash situation worsen. Tanjung will also suffer an RM8 million penalty cost for early bond redemption. Valuations are expensive and consensus forecasts are aggressive. Nonetheless, Ekuiti Nasional's (Ekuinas) next move remains a wild card.
Contrary to market expectations of an earnings rebound in 1Q11, we caution that Tanjung will likely remain in the red (losing RM2 million to RM5 million) with a contracting revenue trend (down 30% to 50% quarter-on-quarter). Losses will be exacerbated by the ongoing cost overruns at its UK-based process equipment unit, Citech Energy Recovery Systems, and Tanjung CSI Sdn Bhd. Its vessel operations will also see weaker earnings. Three of its vessels were idle in 1Q as Petroliam Nasional Bhd embarked on early contract termination.
We remain apprehensive over Tanjung's ability to turn around its engineering equipment, maintenance and drilling and platform divisions. Replenishment rates at these divisions have been poor and sliding. Tanjung will incur RM10 million on dry-docking costs for its three vessels (MV Tanjung Pinang 1, 2, 3) scheduled in 2011. Although most of the idle vessels will be contracted by 3Q, charter rates are likely to be flat with just one- to two-year tenures.
We cut 2011/13 earnings by 40% to 126% ahead of the poor 1Q and erratic earnings for the next nine months. Earnings visibility will remain opaque, making forecasting a challenge. We feel management needs to improve on its cost management, restructure its non-core operations and realign the business direction. We do not rule out the need for a cash call in the mid-term, given the tightening cash flow and high working capital requirements. Net gearing stood at 1.4 times as at December 2010.
Tanjung will refinance its long-term debt to stretch repayment. It will retire the RM110 million bonds and Islamic medium-term notes (RM120 million) and refinance them with a conventional term loan, which will stretch its principal repayment by four years to 2018. However, this would lift interest costs, considering that blended financing rates will grow from 5.6% to 6.0%. Tanjung will suffer a one-off cost of RM8 million from the early redemption, which will be recognised in 2Q. ' Maybank IB Research, April 27
This article appeared in The Edge Financial Daily, April 28, 2011.
Company Name: TANJUNG OFFSHORE BHD
Research House: MAYBANK
Tanjung Offshore Bhd
(April 27, RM1.29)
Maintain sell at RM1.39 with target price of RM1.07: We maintain our 'sell' call as 1QFY11 earnings will likely miss street expectations again. Cost management strategies and operating prospects remain the key concerns. An equity cash-call could ensue should the cash situation worsen. Tanjung will also suffer an RM8 million penalty cost for early bond redemption. Valuations are expensive and consensus forecasts are aggressive. Nonetheless, Ekuiti Nasional's (Ekuinas) next move remains a wild card.
Contrary to market expectations of an earnings rebound in 1Q11, we caution that Tanjung will likely remain in the red (losing RM2 million to RM5 million) with a contracting revenue trend (down 30% to 50% quarter-on-quarter). Losses will be exacerbated by the ongoing cost overruns at its UK-based process equipment unit, Citech Energy Recovery Systems, and Tanjung CSI Sdn Bhd. Its vessel operations will also see weaker earnings. Three of its vessels were idle in 1Q as Petroliam Nasional Bhd embarked on early contract termination.
We remain apprehensive over Tanjung's ability to turn around its engineering equipment, maintenance and drilling and platform divisions. Replenishment rates at these divisions have been poor and sliding. Tanjung will incur RM10 million on dry-docking costs for its three vessels (MV Tanjung Pinang 1, 2, 3) scheduled in 2011. Although most of the idle vessels will be contracted by 3Q, charter rates are likely to be flat with just one- to two-year tenures.
We cut 2011/13 earnings by 40% to 126% ahead of the poor 1Q and erratic earnings for the next nine months. Earnings visibility will remain opaque, making forecasting a challenge. We feel management needs to improve on its cost management, restructure its non-core operations and realign the business direction. We do not rule out the need for a cash call in the mid-term, given the tightening cash flow and high working capital requirements. Net gearing stood at 1.4 times as at December 2010.
Tanjung will refinance its long-term debt to stretch repayment. It will retire the RM110 million bonds and Islamic medium-term notes (RM120 million) and refinance them with a conventional term loan, which will stretch its principal repayment by four years to 2018. However, this would lift interest costs, considering that blended financing rates will grow from 5.6% to 6.0%. Tanjung will suffer a one-off cost of RM8 million from the early redemption, which will be recognised in 2Q. ' Maybank IB Research, April 27
This article appeared in The Edge Financial Daily, April 28, 2011.
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