Acquisition on the cards for TANJUNG Offshore

Tanjung Offshore Bhd
(July 6, RM1.25)

Maintain buy at RM1.26 with lower target price of RM1.40 (from RM1.45): Tanjung Offshore (TOFF) may acquire deepwater assets to move up the value chain. The next deepwater fields (Malikai and Kebabangan) earmarked to come onstream will cost over RM10 billion to develop.

We believe Ekuinas’ entry as strategic investor at RM1.30 per share (pending EGM) will place the company on a stronger footing to expand its marine operation through acquisitions. In our view, TOFF can leverage on Ekuinas’ financial muscle to acquire assets that were not possible with its own capacity by extending financing or taking strategic stakes in the assets.

Next quarter, 2Q10, will see the full earnings impact from TOFF’s fleet of 16 vessels. To recap, in 1Q10 TOFF secured five long-term charter contracts worth about RM265 million for its newbuilds. CITECH, whose losses had weighed down FY09 earnings, has also returned to profit in 2Q10. Overall, we expect strong earnings turnaround in 2010.

We raised FY10-11F earnings by 4% and 7% after imputing higher fleet utilisation as well as interest savings as placement proceeds were used to repay debt. Adjusting for the enlarged share base post placement, our target price is trimmed to RM1.40/share (from RM1.45 previously), pegged to nine times FY11F EPS. Our buy rating is maintained as the stock is still grossly undervalued relative to its peers. Since listing, TOFF has been trading at average 16.9 times PER and 1.5 times PBV. — HwangDBS Vickers Research, July 6


This article appeared in The Edge Financial Daily, July 7, 2010.