Tanjong Plc (Outperform)

One-off is past us, is TI turning?

Event
Tanjong reported its 3Q FY1/09 results. Excluding an estimated RM54m provision for the IPP windfall tax, the results were within expectations.

Tropical Island (TI) reported RM2.6m in pretax profit for the quarter, only the second time ever since it started in 2005.


Impact
Excluding one-offs at the power division, 9M09 was within expectation. At the 9-month mark, net profit rose 7% to RM435m, which represents 71% of our full-year forecast and 72% of consensus. Excluding the IPP windfall tax provision, net profit would have represented 78% of our forecast, or 79% of consensus.

Is Tropical Island (TI) turning around? TI reported RM2.6m in pretax profit in 3Q. Average visitors per day rose sharply to 2,796, while ARPU held at €31.4. This could be because Germans are finding TI to be a value alternative to flying to tropical beaches in Asia. Visitor days have been holding up during November to December. At this point, we maintain our forecast of a RM30–40m loss pa in FY09–11. The recent JV to build 375 vacation homes by April 2010 could boost visitor days further by opening up the market to overnight guests.

Gaming divisions within expectations. Lottery pretax in 9M09 rose 4.4% as revenue per draw edged up by 2%.

Interim dividend is on track to meet our forecast. A third interim dividend of 17.5 sen less 25% tax was declared. This brings the total interim dividend to 52.5 sen (39.4 sen net) and assuming a fourth interim of 17.5 sen and a final dividend similar to the 34 sen in FY08, total dividend would hit 104 sen (78 sen net).
Earnings revision

Incorporating windfall tax and other one-offs raises our FY09 earnings forecast by 3%. No change otherwise.

Price catalyst
12-month price target: RM17.00 based on a Sum of Parts methodology.

Catalyst: Potential power acquisitions, potential listing of power or gaming division, potential turnaround of TI by April 2010.
Action and recommendation

We maintain our Outperform rating on Tanjung. Our DCF valuation of RM17 assumes a cost of equity of 11.5%. The implied target PER is 10x calendarised for 2009.

We believe Tanjong is attractive to investors seeking value and yield, providing solid and stable cashflows with the potential for upside from overseas power acquisitions, the potential listing of the gaming or power division and the turnaround of TI.