• IRB’s probing of IPPs’ tax payment is unlikely to result in negative impact for Tanjong
• Potential upside from new NFO game
• Attractive valuation vs local and regional peers. Maintain Buy with SOP-derived target price of RM19.25.
Minimal impact from tax issue. The Inland Revenue Board (IRB) is checking on IPPs’ tax claims, which may lead to potentially higher tax rates for IPPs. We believe that the check is unlikely to affect Tanjong, and Malaysia power plants account for just 20% and 19% of Tanjong’s FY10-11F net earnings respectively.
Potential new NFO game for Tanjong? Tanjong is the only NFO player that has yet to receive approval from the Malaysian government for a new NFO game in 2009, while Magnum and Berjaya Sports Toto have already received theirs. Near term contribution from the new game is likely to be minimal, but we expect the new game to contribute to revenue in the longer-term, as a potential “jackpot” type game should win over business from the “illegal” betting operators. Improving free cashflow and resilient power earnings will support future dividend payment and potential new acquisitions. We expect net yields of 5% for Tanjong.
Underperformance not justifiable. Tanjong has underperformed the KLCI and local peers with YTD share price appreciation of 18% against 31% for KLCI and average of 21% for local peers. The underperformance is unjustifiable given Tanjong’s resilient earnings, attractive valuations, and potential upside from new NFO games, as well as the prospects of unlocking the value of its power or gaming businesses in the longer term. Tanjong is trading at attractive CY10F PE of 10x against local peers’ average of 13x and regional peers’ average of 16x.
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