The company reported a net profit of RM191.4 million for the three-month period from February to April 2009 — recovering smartly from the immediate preceding quarter in the absence of one-off items.
Tanjong's results underscore the resilience of its key businesses, which we believe will remain steady for the remainder of the financial year, barring unforeseen events or extraordinary charges.
Growth prospects at cheap valuations
We estimate net profit to grow to RM654.5 million in FY10, equivalent to about 162.3 sen per share. This prices its shares at a forward P/E multiple of only 8.8 times - making Tanjong one of the most attractively valued big cap blue-chip stocks on the local bourse.
Shareholders will also earn higher-than-market average yields. We estimate dividends will rise to RM1 per share in the current financial year, on the back of higher earnings. This will translate into gross yield of 7% at the current share price.
Most importantly, we believe that Tanjong remains committed to pursuing a strategy of growth. The company is actively on the lookout for new investing opportunities, particularly within the power generation sector.
It has a strong foothold in developing countries such as Egypt, Bangladesh and Pakistan where power consumption is expected to grow rapidly. Hence, we are sanguine of Tanjong's future growth prospects.
Power rebounds sans one-off items
Tanjong's three local power plants generated EBIT (operating earnings before interest and tax) of roughly RM118 million in 1QFY10, almost double that in the previous corresponding quarter. This was due to the absence of one-off charges - earnings in 1QFY09 were hurt by about RM35 million in development costs written off as well as losses from unscheduled outage.
Meanwhile, earnings from Tanjong's overseas power generating subsidiaries were broadly in line with expectations, EBIT increasing by about 4% year-on-year (y-o-y) to RM147 million. Pre-tax profit from its power associates was also higher at RM15.4 million.
Going forward, contributions from the power business are not expected to vary significantly from that recorded in 1QFY10. Returns from all the power plants are backed by long-term power purchase agreements.
EBIT for its power subsidiaries are estimated to total some RM1 billion for FY10, up from RM793.7 million in the previous financial year. Meanwhile, profit before tax from its power associates is estimated to hold steady at around RM59 million.
Gaming holds steady
Similarly, earnings from the NFO business should also remain fairly steady for the rest of the year. We estimate about 175 draws in total for FY10, including draws carried forward from the previous financial year, and sales per draw growth of about 1.5%.
Although quarterly earnings would fluctuate depending on the luck factor, prize payout should average out at around 65%-66%. Operating profit is estimated at roughly RM239 million in FY10, similar to that in FY09. On the other hand, the RTO business is expected to remain in the red.
Menara Maxis fully occupied
Tanjong's property earnings, primarily rental income from Menara Maxis, too are not expected to see any material volatility. The building achieved full occupancy over the past few years and is expected to remain so for the foreseeable future. The property arm contributes EBIT of over RM40 million a year to Tanjong's coffers.
Losses narrow for Tropical Islands
The Tropical Islands resorts business should fare better in the current financial year. The resorts achieved positive EBITDA (earnings before interest, tax and depreciation) in FY09 on the back of higher visitor numbers and average spending per visitor. This follows the completion of additional facilities under the second phase of development in July 2007.
We estimate operating losses will narrow to about RM20 million in the current financial year, down from losses of RM33.9 million in FY09. However, a significant turnaround is only likely once the last phase of the project takes shape.
Tanjong is partnering with third parties who will independently finance and develop on-site accommodation facilities. This would expand its target market, which currently consists primarily of day-trippers, beyond the local geographical area. The availability of overnight accommodation will also lengthen the duration of stay and raise the average spending per visitor.
The initial phase of the development is targeted for completion by end-2011. Elsewhere, the company will see full-year contribution from TGV Cinemas for FY10 after completing the acquisition of the remaining 50% equity stake. It plans to increase the total number of screens to 114 in the current year, up from 100 at end-FY09.
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.
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