PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Visit

13 April 2010
MARKET DATELINE

Tanjong plc Share Price

Fair Value
:
:
RM18.50
RM19.20
Awaiting The Next Rerating Catalyst Recom : Market Perform
(Downgraded)

Table 1 : Investment Statistics (TANJONG; Code: 2267) Bloomberg: TJN MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY

Jan (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2010 5,219.9 676.8 167.8 165.1 26.4 11.2 - 2.0 0.95 18.8 5.4
2011f 5,325.4 693.1 171.9 171.9 4.1 10.8 172.0 1.8 0.74 17.3 5.5
2012f 5,403.7 707.8 175.5 175.5 2.1 10.5 177.0 1.6 0.56 16.1 5.6
2013f 5,474.0 712.3 176.6 176.6 0.6 10.5 184.3 1.5 0.41 14.8 5.7
Main Market Listing / Trustee Stock / Non-Syariah-Approved Stock By The SC # Excl EI * Consensus Based On IBES Estimates

♦ Power division. The next leg of growth for the power division would Issued Capital (m shares) 403.3
depend on acquisitions and management had previously expressed a target Market Cap (RMm) 7,460.2
of doubling its current power capacity to 8,000MW over the next four to five Daily Trading Vol (m shs) 0.5
years. This could include greenfield and/or brownfield projects with 52wk Price Range (RM) 12.90-19.12
particular focus on regions such as South Asia, South East Asia, Middle East Major Shareholders: (%)
and North Africa. According to management, globally, the power industry Tan Sri Ananda Krishnan 30.9
appears to be showing signs of recovery from the economic crisis and Capital Group 8.9
greenfield projects that were previously deferred are now seeing a return.
Tanjong’s preference is for greenfield projects and management has a
target IRR of low-mid teens for greenfield projects in emerging markets. FYE Jan FY11 FY12 FY13

♦ Gaming division. While we understand Tanjong could launch a new

EPS chg (%)
Var to Cons (%)
-
(0.1)
-
(0.8)
-
(4.1)
jackpot game later this year, not many details are known at the moment.
Nevertheless, we believe the game would likely be similar to BToto’s jackpot PE Band Chart
games. Assuming the new game brings in around RM1m in sales per draw,
we estimate a full-year impact could lift our earnings projections by around PER = 14x
2%. As for the RTO segment, while management continues to work towards PER = 12x
PER = 10x
a resolution to the escalating expenses, the message we took away was PER = 8x
that this would take time. In our model, we have assumed operating losses
of RM60m p.a. for FY11-13.

♦ Leisure division. For Tropical Islands (TI), visitor arrivals and ARPUs have
been trending up while construction of accommodation (19 homes built and
sold thus far) should further help address the challenge of low weekday
visitor attendances and short stay visitors. As for TGV, we expect its FY10
operating profit contribution of RM14.8m to hold steady going forward. Relative Performance To FBM KLCI

♦ Others. While Tanjong does not have a specific dividend policy, we FBM KLCI
understand that dividends going forward should not be lower than FY10’s
gross DPS of RM1. We project FY11-13 gross DPS of RM1.02-1.06, which
translates to net dividend yields of 4.1-4.3%. Tanjong plc

♦ Risks. 1) Stronger RM/US$ would impact overseas power profits; 2)

Higher-than-expected NFO prize payout; 3) Sovereign risk of overseas
power projects; 4) Change in landscape under the National Energy Plan;
and 5) High foreign shareholding (38.5% as at end-Feb).

♦ Forecasts. No change to our forecasts for now.

♦ Investment case. Our SOP-derived fair value of RM19.20 is unchanged.

Tanjong’s strong share price performance means that the gap to our SOP
valuation has narrowed significantly and the stock’s total potential return of
8% is roughly in line with our expected market return. Consequently, we
have downgraded our recommendation to Market Perform from
Outperform. In our view, Tanjong stands a strong chance in securing some
of the new power projects, which we believe would be value accretive. Our David Chong, CFA
SOP valuation does not reflect such additions and hence, we see upside (603) 9280 2186
potential to our fair value if Tanjong is successful with its bids. david.chong@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 5

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 13 April 2010

Power division

♦ In search of growth. The next leg of growth for the power division would depend on acquisitions and
management had previously expressed a target of doubling its current power capacity to 8,000MW over the next
four to five years. This could include greenfield and/or brownfield projects with particular focus on regions such
as South Asia, South East Asia, Middle East and North Africa. According to management, globally, the power
industry appears to be showing signs of recovery from the economic crisis and greenfield projects that were
previously deferred are now seeing a return, especially in the Middle East and India. Liquidity has also improved,
although financing conditions are still tighter than pre-economic downturn (e.g. lenders require higher equity
participation, shorter financing period). Between greenfield and brownfield projects, Tanjong’s preference is for
greenfield projects and management has a target IRR of around low-mid teens for greenfield projects in
emerging markets. From the list of potential greenfield opportunities below (Table 2), we believe Tanjong has a
strong chance of securing some of the projects in countries such as Bangladesh, Egypt and UAE given their
existing presence in these places.

Table 2 : Potential Greenfield Opportunities

Project Type Capacity (MW) Project Type Capacity (MW)
Bangladesh (Meghnaghat 2) CCGT 350-450 Oman (Duqm) Coal 1,000
Egypt (Dairut) CCGT 1,500 Saudi Arabia (Qurayyah) Thermal 2,000
India (UMPP) Coal 4,000 Tunisia (Bizerte) CCGT 300-450
Indonesia (Java) Coal 2,000 UAE (Shuweihat 3) CCGT 1,600
Source: Company

Gaming division

♦ NFO potential catalyst ahead in the form of new game ... While we understand Tanjong could launch a new
jackpot game later this year, not many details are known at the moment. Nevertheless, as highlighted in our
Gaming Sector report – “New Opportunities From Further Liberalisation Of Policies?” on 8 Apr, we believe the
game would likely be similar to BToto’s jackpot games, given that Magnum has patented its 4D-jackpot game.
However, we note that Magnum has not patented the “cascade” feature of its 4D-jackpot game, which means
that Tanjong would be able to implement this feature in its new game. We understand that this feature of
Magnum’s 4D jackpot game has been a strong attraction point for punters. We believe it would be important for
Tanjong to balance the strike risk for the jackpot, so that it is not too difficult, nor too easy for punters to win, in
order to gain a following and increase its market share. Assuming the new game brings in around RM1m in sales
per draw, we estimate a full-year impact could lift our earnings projections by around 2%.

♦ … but resolution to RTO woes could take time. As for the RTO segment, this segment has surpassed
Tropical Islands (TI) in terms of operating losses (FY10: RM65.8m vs. TI: RM22.7m) as a result of escalating
totalisator expenses and consequently, is now the biggest drag to the group’s earnings. Management continues
to work towards a resolution to the escalating expenses but the message we took away was that this would take
time. In our model, we have assumed operating losses of RM60m p.a. for FY11-13.

Leisure division

♦ TI showing operational improvements, further supported by stable TGV earnings. As for the leisure
division, FY10 operating losses narrowed significantly to RM7.8m, from an operating loss of RM29.4m in FY09.
This was due to a combination of operational improvements at TI (FY10 operating loss narrowed to RM22.7m
from RM33.9m in FY09) and a full-year’s contribution from TGV. Generally, visitor arrivals and ARPUs have been
trending up for TI. The construction of accommodation (19 homes built and sold thus far) should further help
address the challenge of low weekday visitor attendances and short stay visitors. As for TGV, we expect its FY10
operating profit contribution of RM14.8m to hold steady going forward.

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 13 April 2010

Others

♦ Dividend. While Tanjong does not have a specific dividend policy, we understand that dividends going forward
should not be lower than FY10’s gross DPS of RM1. This translates to a net payout ratio of 45.4% and implies a
baseline net yield of 4.1%. We project FY11-13 gross DPS of RM1.02-1.06, which implies a net payout ratio of
44.5-45.5% and net dividend yields of 4.1-4.3%.

♦ Demerger of gaming and power. Tanjong continues to explore opportunities that can help enhance
shareholder value, and this could include a demerger. YTD, Tanjong’s share price performance has done rather
well and as a result, the gap to our as well as consensus SOP valuation (consensus median fair value of
RM19.90, according to Thomson) has narrowed in recent months. Consequently, we think there is now less of a
need for a demerger to take place. This is because the market now appears to be valuing Tanjong’s assets fairly,
which suggests that a demerger exercise may not necessarily add significantly more value at the current
juncture.

Table 3 : YTD And 12-Month Returns

FBM KLCI Tanjong TNB YTLP
YTD total returns 6.2 9.9 1.8 3.5
12-month total returns 47.2 37.3 34.2 22.6
Source: Bloomberg

Risks

♦ Risks to our view. 1) Stronger RM/US$ would impact overseas power profits; 2) Higher-than-expected NFO
prize payout; 3) Sovereign risk of overseas power projects; 4) Change in landscape under the National Energy
Plan; and 5) High foreign shareholding (38.5% as at end-Feb).

Forecasts

♦ No changes to forecasts for now. We have maintained our earnings forecasts.

Valuations And Recommendation

♦ SOP-valuation unchanged, but downgrade to Market Perform on limited upside potential. Our SOP-
derived fair value of RM19.20 is unchanged. However, Tanjong’s strong share price performance means that the
gap to our SOP valuation has narrowed significantly and the stock’s total potential return of 8% is roughly in line
with our expected market return. Consequently, we have downgraded our recommendation to Market Perform
from Outperform. In our view, the next key rerating catalyst for the stock is the additions of new power assets.
We believe Tanjong stands a strong chance in securing some of the new projects, which we believe would be
value accretive. Our SOP valuation does not reflect such additions and hence, we see upside potential to our fair
value if Tanjong is successful with its bids.

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 13 April 2010

Table 4 : SOP Fair Value Calculation

SOP (RMm) SOP/share (RM)
Domestic power DCF @ WACC of 9.7% 3,274.2 8.12
Egypt power DCF @ WACC of 9.5% 637.4 1.58
Globeleq power DCF @ WACC of 10% 586.8 1.46
Gaming @ 15x PER 1,953.1 4.84

Other assets:
Tropical Island (BV less losses) 70.0 0.17
TGV @ BV 70.2 0.17
Menara Maxis @ BV 672.0 1.67
Taweelah B (10%) - Equity value of US$3bn cost 204.0 0.51
Less: Net debt (excl debt arising from acquisitions) 271.1 0.67
Total revalued NAV (RMm) 7,738.8 19.19
Share cap (m) 403.3
Source: RHBRI estimates

Table 5 : Earnings Forecasts Table 6 : Forecast Assumptions

FYE Jan (RMm) FY10a FY11F FY12F FY13F FYE Jan FY11F FY12F FY13F
Power 2,811.7 2,767.0 2,793.4 2,809.6 Power plant capacity (MW)
Gaming 2,043.2 2,164.2 2,196.7 2,229.7 - Teluk Gong (Powertek) 440 440 440
Property 57.1 53.9 55.2 56.6 - Tanjung Kling (Pahlawan) 330 330 330
Leisure 307.8 340.3 358.3 378.1 - Teluk Gong 2 (Panglima) 720 720 720
Turnover 5,219.9 5,325.4 5,403.7 5,474.0 - Suez Gulf 683 683 683
Growth (%) 4.8 2.0 1.5 1.3 - Port Said East 683 683 683
- Globeleq (effective stake) 751 751 751
EBITDA 1,499.1 1,481.3 1,475.9 1,471.9 Total installed capacity - Msia 1,490 1,490 1,490
EBITDA margin (%) 28.7 27.8 27.3 26.9 Total installed capacity - Overseas 2,116 2,116 2,116
Depreciation (296.8) (308.6) (313.9) (318.9) Gaming
No. of outlets 347 347 347
EBIT 1,202.3 1,172.7 1,162.0 1,153.1 Ticket sales (RMm) 2,164 2,197 2,230
Net int exp/Other inc (358.9) (309.1) (284.3) (273.6) Ticket sales growth (%) 5.4 1.5 1.5
Associates 87.8 92.5 94.8 98.1 Sales/Draw (RMm) 12.7 12.9 13.1
Exceptionals 22.0 0.0 0.0 0.0 Payout (% of gross sales) 65.0 65.0 65.0
Pre-tax profit 953.3 956.1 972.4 977.6
Tax (204.7) (186.1) (186.0) (186.2)
Minorities (71.8) (77.0) (78.6) (79.1)
Net profit 676.8 693.1 707.8 712.3
Net excl EI 665.7 693.1 707.8 712.3

Source: Company data, RHBRI estimates

Chart 1: Tanjong Technical View Point

♦ After testing the RM18.00 level in early Jan 2010,
the share price of Tanjong formed a triangle
formation pattern on the chart.

♦ The stock narrowed closer to the triangle tip near

RM18.00 recently, and broke out from the
formation, and reached a high of RM19.12, but was
immediately smashed with a steep pullback.

♦ It stabilised just at above the RM18.00 breakout

point, and registered a small positive candle on
Monday.

♦ Given that the stochastic oscillators have been fully

neutralised, another positive candle could instigate
further buying support in the near term.

♦ As such, so long as the stock sustains at above

RM18.00, upside may still be possible for a test to
the RM19.50 level, in our view.

♦ Downside risks will reappear when it falls to below

RM18.00. The next lower support is only at
RM16.70.

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
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contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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may from time to time have an interest in the securities mentioned by this report.

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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