The company is, however, looking at numerous ways to increase cash flow and further strengthen the balance sheet, including the sale of its gaming operations, the source adds.

It is understood that there is currently no attractive offer on the table for Tanjong’s gaming division, the group’s second-largest earnings contributor, which accounted for  about 19% of the group’s RM3.69 billion total revenue and RM1.12 billion operating profit for FY2009 ended Jan 31.

The source would not comment on speculation that Tanjong may “swap” its gaming assets for highland casino and resorts operator Genting Bhd’s power assets.

Tanjong last year denied being one of the parties interested in Genting’s power assets when news that they were up for sale emerged in the middle of last year. Genting’s prized power asset is the Genting Sanyen plant in Malaysia — a first-generation independent power producer that is deemed to have the more lucrative power purchase agreements. Genting also owns four power plants in China with a combined generating capacity of 951mw and two power plants in India with a generating capacity of 481mw.

In July last year, Tanjong’s chairman Datuk Robert Cheim said the company was not planning to list its power assets due to the unfavourable market conditions.

Nonetheless, analysts who cover Tanjong, the power and gaming vehicle of businessman T Ananda Krishnan, have long considered the possibility of a separate flotation of its power or gaming division as a potential price catalyst for the stock that is currently paying healthy dividends.

“If the power division lists separately, we think Tanjong’s price-earnings ratio could re-rate to 12.5 times,” Macquarie Research said in a note earlier this month. Its RM17 target price for Tanjong, derived using the sum-of-parts methodology, implies a valuation of 10.5 times calendar year 2010 PER.

RHB Research, which has a RM19 target price for Tanjong, values the latter’s domestic power business at RM3.24 billion or RM8.03 a share. Tanjong also has power assets in Egypt, Bangladesh, Pakistan, Sri Lanka and Abu Dhabi. In a note dated April 1, RHB estimates that Tanjong’s power plant in Egypt is worth RM637.4 million (RM1.58 a share) while the Globeleq Ltd power plants (in Bangladesh, Pakistan and Sri Lanka) that Tanjong acquired in November 2007 are valued at RM586.8 million (RM1.46 a share), based on discounted cash flow.

Tanjong’s gaming operation is worth RM2.37 billion or RM5.89 a share, based on 15 times earnings, RHB Research says in the same note.

Tanjong’s gaming division consists of its numbers forecast totalisator (NFO) and racing totalisator (RTO) business. The latter has suffered operational losses for at least six years. The segment made an operating loss of RM26.9 million for FY1/2009, the highest in at least six years, and up from an operating loss of RM7.7 million for FY1/2008 due to an “escalation in totalisator expenses”.

The NFO business, which houses Tanjong’s popular permutations-based IBOX product, made an operating profit of RM237.3 million for FY1/2009, up 0.3% from RM236.6 million y-o-y, despite gross proceeds falling 2% to RM1.99 billion from RM2.03 billion due to six lesser draws in FY1/2009.

Tanjong’s gaming arm Pan Malaysian Pools Sdn Bhd reportedly has about 24% market share, the least of the country’s three players. Berjaya Sports Toto Bhd’s market share is about 40% while Magnum Corp Bhd’s is 36%.

Tanjong’s power business is the group’s largest earnings contributor. Revenue from this segment jumped 47% to RM2.7 billion in FY1/2009, boosted mainly by the inclusion of a RM604 million contribution from the Globeleq plants as well as improved energy billings locally. Operating profit, however, was only up RM19 million to RM794 million y-o-y due to the one-time RM85 million windfall tax levy as well as some RM49 million in business development costs.

Tanjong, in notes accompanying its full-year results ended Jan 31, 2009, said the group would benefit from the reduction in borrowing costs to be derived from refinancing exercises as well as further expansion of its power business.
In an April 1 note, Macquarie Research says Tanjong’s valuation would go up if it acquired more power assets that provide additional cash flow.

Other possible re-rating catalysts include a turnaround in Tanjong’s loss-making investment in the Tropical Islands resort in Germany, that is carried at €76 million  (RM372 million) and is expected to incur an operational cash outlay of €6 million a year.

Tanjong is in “advanced negotiations” with third parties to commence the construction of vacation homes near the resort in the current financial year. The outcome of these negotiations and the status of the planned construction will determine whether there is a need for further write-offs in the carrying value of this investment, the company says.

Most analysts still see value in Tanjong due to its stable cash flow and its ability to pay decent dividends. Nineteen out of 22 brokers polled on Bloomberg have a “buy” on Tanjong, while two — AmResearch and Kim Eng Research — have a “hold”. Target prices range from AmResearch’s RM14.70 to MIMB Investment Bank’s RM20.40. Tanjong closed at RM14.20 last Friday.

Tanjong has been paying dividends every quarter, with gross yields estimated at about 8% currently. For the year just ended, Tanjong paid a 90-sen dividend, which translates to 6.5% gross yield and 51% net payout ratio. Tanjong’s other assets include its 67% stake in Impian Klasik Sdn Bhd, which owns Menara Maxis that was recently valued at RM650 million.

This article appeared in the Corporate page, The Edge Malaysia, Issue 751, April 20-26, 2009.