Tanjong ... Dec09

Results Review & Earnings Outlook

 Tanjong’s 3QFY10 (Jan.) net profit rose 83.0% YoY to MYR177.8 mln,
driven by improved contribution from its overseas power plants, lower
business and development costs, the absence of windfall levy for
Powertek, and a turnaround at Tropical Island (TI) (EBIT of MYR0.9
mln). This was despite a slightly higher effective tax rate of 21.4% vs
18.6% in 3QFY09, as well as lower contribution from the gaming
division due to higher operating expenses, though prize payout was
maintained at 65%.

 Overall, the results were at the high-end of our expectations. This took
YTD net profit to MYR550.7 mln, accounting for 80.7% of our FY10
forecast of MYR682.2 mln.

 Note that contribution from its overseas power plants would have been
better if not for the gas curtailment affecting the Sidi Krir power plant in
Egypt. For TI, agreements have been entered with third parties for the
construction and provision of vacation homes to capture the growing
European market and to improve its average revenue per visitor.
Nevertheless, the impact may only be reflected in FY12 results.

 We maintain our profit forecasts with a two-year recurring net profit
CAGR of 7%, driven by steady growth in gaming and power earnings.
Tanjong has declared a 3rd interim dividend of 17.5 sen (less 25% tax)
(unchanged from the preceding year) payable on January 15, 2010.
We maintain our FY10 gross DPS forecast of 95 sen/share.

Recommendation & Investment Risks
 We downgrade Tanjong to Buy (from Strong Buy) following the rise in
the share price. Tanjong is well-managed and offers relatively
defensive earnings and a decent gross dividend yield of about 5.8%.

 The stock has underperformed the broad market with a YTD gain of
23.6% vs 43.7% for the FBM KLCI. At current levels the stock is
trading at FY11 PER of 9.3x, which is below the market and its peer
group. Potential share price catalysts include (1) earnings accretive
acquisitions, (ii) spinning off its gaming arm, (iii) approval for new
games, and (4) a sustainable turnaround for TI.

 We have raised our 12-month target price to MYR19.00 (from
MYR18.00) after rolling over our valuation period to FY11. Our
valuation continues to be based on a 10% discount to our estimated
sum-of-parts (SOP) value. The main components of our SOP valuation
are the power and NFO businesses, which we have valued on a DCF
basis. NFO cashflow is discounted using a cost of equity of 12% to
13%, and assumes terminal growth of 3%. Valuation for the power
division is based on a combination of DCF and PER.

 Risks to our recommendation and target price include: (i) changes in
gaming and power regulations, (ii) inefficient utilization of its excess
funds, (iii) stronger-than-expected forex fluctuations and (iv) lowerthan-
expected results from TI.

Summary:
Incorporated in England in 1926, Tanjong is
listed on both Bursa Malaysia and the London Stock
Exchange. The group has three core businesses, namely
power generation, gaming and leisure. It is part of Tan Sri
Ananda Krishnan’s Usaha Tegas group. The stock is a
component of the FBM KLCI and FBM EMAS.