TANJONG to be privatised at RM20-RM21 per share?

MEASAT Global Bhd’s privatisation exercise announced on Wednesday has fuelled rumours that the deal is only the tip of the iceberg — and that a double privatisation, this time for power conglomerate Tanjong plc, is on the horizon.

Tanjong’s shares remain suspended and the company is expected to make a corporate announcement on the deal today.

On Tanjong’s next step, industry insiders told The Edge Financial Daily that the company may be privatised at a 15% to 20% premium to the last listed price of RM17.58. This works out to between RM20 and RM21 per share. Reuters yesterday also reported a privatisation price of RM20.50, which falls within the anticipated range.

Although it houses gaming, property investment and leisure businesses, Tanjong is in effect a power generation company. Based on the 2010 annual report, the power division contributes 82% of group operating profit, chalking up RM1 billion of the group’s RM1.2 billion total. Gaming contributes 14% of the group’s operating profit.

The estimated privatisation price of RM20 to RM21 per share is about double the stock’s net asset value of RM10.59 per share as at April 31, 2010.

Moreover, based on research reports released since June 24, 2010, analysts’ average target price for Tanjong plc was RM19.08, below the rumoured privatisation price.

So, will it be very good news for minority shareholders then?

Although the proposed price of RM20 to RM21 may seem good to minority shareholders, analysts told The Edge Financial Daily that they expected the long-term value of Tanjong to perhaps double from the current stock market price of RM17.58, thus far exceeding even the estimated offer price of RM21 by about 50%.

The growth stems from the management’s aim to double Tanjong’s power capacity from 4,000MW to 8,000MW over the next four to five years, mostly through organic growth and acquisitions.

“Tanjong has much better potential over the long term than even RM21. They aim to double their core business of power generation. This would effectively almost double their earnings and share price. To sell at RM21 would be undervaluing the share,” said an analyst.

Based on research reports released in the past month, 16 analysts have buy calls on the stock, with seven recommending a hold. There were no sell calls.

If Tanjong is indeed privatised, it will be sorely missed by investors as the stock is well favoured for its defensive earnings and high dividend yield.

Tanjong also compares favourably to other companies in the power generation industry, with a lower estimated forward price-to-earnings ratio (PER) of 11 times, compared with YTL Power Bhd’s estimated PER of 15 times and MMC Corp Bhd’s estimated PER of 15 times.

In the three months ended April 30, 2010, Tanjong posted a net profit of RM177.24 million, or 44 sen per share, on the back of revenue of RM1.26 billion. This was 7% lower than the net profit of RM191.41 million in the prior corresponding period.

The company’s cash balance stood at RM1.54 billion against borrowings of RM4.78 billion.

What will later happen to Tanjong?
T Ananda Krishnan is known for his savvy corporate moves, which has seen some of his companies floated, then privatised, and then re-floated.

The unhappiness that sparked when Ananda raked in sizeable gains from the sale of Maxis Bhd to Saudi Telecom Co showed that while the billionaire is reclusive from the public eye, his corporate actions remain anything but.

After Maxis’ privatisation and delisting in 2007, Ananda sold a 25% stake in Maxis Communications Bhd to Saudi Telecom for US$3 billion (RM9.57 billion), shortly after acquiring the remaining 40% of the company not owned by him for RM16 billion or US$4.6 billion.

He then relisted Maxis Bhd, containing only the mature Malaysian operations and none of the fast-growing Indian and Indonesian operations, which remained under Maxis Communications Bhd, an unlisted entity controlled by him.

Industry insiders and analysts said that could possibly be repeated in a similar fashion, with the relisting of only the power operations, while the gaming and other businesses were kept private.

“There is little room for growth in the mature gaming industry, which will likely be kept private. However, it is a valuable cash cow and churns out cash of close to RM200 million annually,” said the analyst.

Analysts agreed that besides the power generation and gaming business, the other smaller entertainment and leisure divisions offered little potential in comparison.

Thus, even if Tanjong plc is indeed privatised, investors will still be keenly watching his next moves on the company’s assets.

This article appeared in The Edge Financial Daily, July 30, 2010.