Tanjong plc is one of those rare companies with one foot firmly in the past and one decidedly pointed towards the future.
A fixture of corporate Malaysia for just under two decades, Tanjong’s roots actually stretch further back, to 1926 in the UK where it was known as Tanjong Tin Dredging Ltd. The company gained its current incarnation following a restructuring and the injection of Pan Malaysian Pools Sdn Bhd in 1991.

With its long history, it would not be a stretch to call Tanjong the bedrock of businessman T Ananda Krishnan’s empire. This can be seen from the fact that Ananda has kept his 30.92% stake in Tanjong, held through his Usaha Tegas group, since the company’s inception. The company’s other major shareholders have held onto their shares for just as long.

With its old-school core portfolio of regulated assets, spanning the power and the number forecast totalisator (NFO) businesses, Tanjong’s strong cash flow makes it an ideal defensive stock.

Over the past five years, Tanjong’s operating profit has grown from RM557.4 million for FY2006 ended Jan 31, to RM1.2 billion in FY2010.

In the same period, Tanjong’s cash flow from operating activities has grown by 127.4%, an average of 25% per year, from RM728.4 million as at Jan 31, 2006, to RM1.7 billion in FY2010. As at end-April, Tanjong’s operating cash flow was RM454 million, while its cash and bank balances stood at RM1.5 billion.

The company is known for its generous dividend payouts, which increased from 90 sen per share in FY2008 and FY2009 to RM1 in FY2010.

However, one word commonly used by analysts who describe the stock is “undervalued”, because it has never been able to live up to its top billing.

“At the moment, Tanjong’s power assets are being valued on a PER of around 11 times. By rights, the assets should be valued at close to 15 times, which is what its peers are valued at,” says a power analyst.

Almost all research houses covering Tanjong have a “buy” recommendation on the counter, with target prices ranging from RM17.95 to RM20.20. In comparison, Tanjong’s share price has been trading at an average of RM16.84 over the past 12 months, closing at a pre-suspension price of RM17.88 last Tuesday.

“It has always been hard to pinpoint why Tanjong has never been able to perform as well as its peers. For years, there has been talk of wanting to unlock value in Tanjong, most notably through the overseas listing of its power assets. However, the plans never reached fruition,” says an analyst.

Tanjong’s core business, and its star performer, is its power division.

As at April 30, power contributed 70.1%  (RM666.1 million) to group revenue and 78.1% (RM238.4 million) to operating profit. Locally, its power assets in Teluk Gong are managed by Powertek Bhd, which was taken private in 2003.

Not being a company to rest on its laurels, Tanjong has always been open about its aspirations to become a global power player. A common goal among the local power companies, but one that always seems just out of reach.

Tanjong’s first taste of the international arena was in January 2005, when it acquired a 10% stake in the Taweelah B independent water and power project in the United Arab Emirates for US$55 million (RM174.8 million).

Later the same year, Tanjong acquired two power plants in Egypt from EDF International SA, the wholly-owned international arm of Electricite de France, for US$307 million.

However, the company’s real coup came two years later when it acquired seven power plants from Globeleq for RM1.7 billion, automatically extending its presence to Bangladesh, Pakistan and Sri Lanka. It should be kept in mind that Tanjong was not even considered the frontrunner for the deal, upping its bid at the 11th hour.

Aside from power, Tanjong’s other significant revenue stream is its NFO business, which as at end-April reported an operating profit of RM64 million on the back of RM187.2 million in revenue.

In addition to power and gaming, Tanjong’s other businesses include leisure and property development. However, contributions from leisure, while on the mend, are still small at this stage. Its biggest property asset currently is Menara Maxis, which is valued at RM672 million according to the latest figures provided by the company.

While Ananda’s offer of RM21.80 is at a premium, analysts say it still does not reflect the potential performance of its power assets.

Ultimately it will be the power assets that hold the most value in Tanjong. Although the NFO business has proven healthy, Tanjong continues to see losses from its other gaming division, its racing totaliser operations. According to a UOB Kay Hian report, the losses could reach up to RM80 million for FY2011.

Exacerbating the problem is the government’s recent decision to increase betting duties by 2%, which came as surprise to all NFO operators. While Tanjong has submitted an application to the Ministry of Finance to lower its prize payouts to mitigate the situation, the matter has yet to be settled.

This article appeared in Corporate  page, The Edge Malaysia, Issue 817, Aug 2-8, 2010