Tanjong ... Jul10

S&P Results Review & Earnings Outlook

• Tanjong’s 1QFY11 (Jan) results were in line with our expectations and consensus forecasts. Net profit declined 7.4% YoY to MYR177.2 mln due to lower earnings contribution from the power (-10.0% YoY) and gaming (-19.2% YoY) divisions, though cushioned by improved results from Tropical Islands (TI) and TGV, and lower interest expense. 1QFY11 net profit accounts for 25.4% of our FY11 forecast of MYR697.8 mln.

• Power revenue dropped 3.9% YoY due to lower billings for Powertek, which was mitigated by higher Egypt power revenue. Nevertheless, EBIT margin declined to 35.4% from 38.2% in 1QFY10 due to lower
translated earnings following the stronger MYR against the USD, as well as lower contribution from Powertek partly due to maintenance works. NFO revenue also fell 4.6% YoY following the introduction of
common draw days for special draws, which led to an 8.9% decline in revenue per draw. The combination of a slightly higher prize payout of 63% (from 61% previously) and additional tax payments on special
draws resulted in a 19.2% YoY drop in NFO EBIT.

• Tanjong has declared a higher 1st interim DPS of 20 sen less 25% tax, from 17.5 sen in 1QFY10, which is in line with our higher DPS estimate for FY11. Going forward, Tanjong is actively scouting for opportunities to expand its power generation capacity to 8,000MW (from 3,950MW now) within five years, and some acquisitions can be expected this year.

Recommendation & Investment Risks
• We maintain our Buy on Tanjong and our 12-month target price of MYR20. Tanjong is well-managed and offers relatively defensive earnings: about 97% of its FY11 earnings are derived from the power (77%) and NFO (20%) operations. It offers a decent gross dividend yield of about 6.0% and an undemanding FY11 PER of 10.1x, below the market and its peers. Potential share price catalysts are earnings accretive acquisitions and a higher-than-expected dividend payout.

• In a latest development, the government has raised the betting duties by 2%-pt to 8% from June 2010. We believe the impact is minimal on Tanjong's bottomline and may be partially mitigated by an adjustment
to the payout ratio. In a worst-case scenario, assuming no adjustment to the payout ratio, we estimate that the net impact will not be more than a 4% reduction in full-year earnings.

• Our target price continues to be based on a sum-of-parts basis. We value the power and NFO businesses based 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) weakerthan-
expected results from TI.