Thursday, September 13, 2007


Tanjong Plc, Stirred Not Shaken

I have been intrigued by the share price movements in Tanjong Plc for the past two weeks. Volume is not there but the price movements tell me something is stirring in the pot of gold. At a time where fund managers are likely to be NOT accumulating positions or trying to move to neutral on all equities, the movements in Tanjong is all the more interesting. I do not have any inside information or winning whispers, all I am concluding is from the price movements in light of present market conditions. When you are old enough or have lost enough money, that's the kind of "wisdom" you get I guess ; ) ...

Without babbling further, the interest could be due to:


a) a separate listing of its power assets, which would unlock enormous values

b) a privatisation, ala Maxis


c) sale of gaming business, not that hot anyway as their hands and feet are tied in that business by the government


A separate overseas listing is likely, as that will bring better valuations and better access to capital. It is now the second largest IPP in Malaysia with 1,490MW capacity. Internationally it has a capacity of 1,565MW. Moving ahead, the international business will expand to a total capacity of 2,354MW by year end.

Growth lies in international, esp developing countries. Its recent acquisitions were in Egypt, Sri Lanka, Bangladesh and Pakistan. By listing it will bring about better matching of revenue and expenses.
The power business brings in 80% of the group's operating profit.

The overall valuation of the company has been dragged down by the ambitious but precarious Tropical Island leisure business in Europe, and the flattish under-performing gaming side due to unfavourable government regulations. As at the time of writing power assets in Tanjong gets a 9.5x PER rating while most regional power plays get between 12x-14x.


The attraction in an overseas listing will be huge because there are not many power plays with such a strong and diverse portfolio in Asian developing countries. The diverse portfolio is very important as it brings about familarity in operaing in various countries, and the ability to leverage on the developing economies' growth & sustainability of demand.


As a better ploy, I would personally advise AK to take the company private at RM22.00 and then relist the power assets. That's because I think the power assets can be worth a lot at IPO level, hence better to gobble the free float. Plus the embarrassment that is Tropical Island, can be put away from prying eyes until the tide has turned. Why I would take it private - it now has RM1.4bn cash with a net gearing of just 0.8x. Usaha Tegas collectively has 31%. To mop up the odd 65% = 403m x 0.65 x 22.00 = RM5.7bn. No shortage of lenders for buying a company with RM1.4bn in the bank, plus AK's got lotsa dough following the Maxis exercise.

In fact, I think the privatisation offer could still be good up to RM24.00. Tanjong's assets and balance sheet is a dream for big private equity firms.
Everyone thinks that option (a) is a certainty, but option (b) looks more interesting to me, plus it will still take care of option (a) albeit just a bit later than planned.

2 comments:

yusuf said...

i agree with your view that tanjong is ripe for a restructing to unlock its true potential. one of the few major and efficient asian energy players. it plays well to the energy theme plays what with the current high oil price.

Salvatore_Dali said...

yusuf,

to go a bit further.... they should make 0.8 x 630m from power side in net profits in the current financial yr = RM504m. If that lists at 12 x earnings = mkt cap of new vehicle = RM6.048bn ... AK can offload 20% at the new IPO and get back RM1.2bn immediately. Since AK would have to spend RM5.7bn to take the company private, he can immediately whack down the actual outlay by RM1.2bn from IPO and another RM1.4bn in cash. Which means AK used to own 31% of Tanjong, following the exercise he only needs to spend RM3bn and ends up with 80% of the power assets plus 100% of the rest of Tanjong's assets.