TANJONG : Ananda stands to profit again

Interest in Tanjong plc’s gaming business is heating up and tycoon T Ananda Krishnan could well end up a big winner as he realises more value from the recently privatised company by carving up its gaming and power assets.

The frenzy over Tanjong’s gaming unit is increasing as Ananda is said to be closing the sale soon. Analysts say Tanjong could command a premium as it has the privilege of being the only gaming business that is up for sale in Southeast Asia at the moment. It was rumoured that the price tag for the gaming unit could be in the region of up to RM2.5 billion.

A report from online news portal The Malaysian Insider yesterday speculated that the Malaysian Chinese Association (MCA), the main Chinese political party in the Barisan Nasional coalition, could be interested in bidding for the gaming unit. This was flatly denied by the party’s president Datuk Sri Dr Chua Soi Lek.

“The report is purely speculative because we have no interest in bidding for Pan Malaysian Pools Sdn Bhd,” he said in statement yesterday, referring to Tanjong’s gaming subsidiary. “The MCA is open to any investment opportunities, but it has no intention to be involved in gaming businesses.”, he said.

MCA presidential council member Loh Seng Kok said he “had heard nothing about it [the bidding for Tanjong’s gaming business]” when contacted by The Edge Financial Daily earlier yesterday.

Speculation of the MCA looking into Tanjong’s gaming business coincided with the announcement last week that its investment arm Huaren Holdings Bhd had transferred 313.31 million shares valued at RM1.28 billion in Star Publications (M) Bhd to MCA itself. The shares, representing a 42.4% stake in the company, were transacted at RM4.09 a piece.

The parties rumoured to be vying for Tanjong’s gaming business include the Cheng family, Filipino tycoon Roberto Bobby Ongpin and the Genting group.

The Cheng family, headed by Datuk David Cheng, is primarily involved in the slot machine business and in the food and beverage industry through the popular Chinese restaurant chain Dragon-I.

Ongpin, who served as the Philippines’ minister of trade and industry from 1979 to 1986, also reportedly has a sizable interest in online gaming businesses in the Philippines, apart from his property and telecommunication businesses.

It is learnt that Tanjong had already expressed its interest to sell its gaming division as early as 2007. Among the interested parties then were Genting and Multi-Purpose Holdings Bhd. But no deal materialised.

Its intention to sell the gaming unit then could have stemmed from the fact that many Malaysia-based and syariah-compliant institutional investors were not able to invest in

Tanjong’s growing power assets since the group was involved in gaming. This accounts for the fact that Tanjong has always been viewed by analysts as an undervalued conglomerate and the periodic market talk of a de-merger of the group’s power and gaming businesses over the years.

What it mean for AK

Tycoon Ananda privatised Tanjong this year at some RM12 billion, based on the general offer price of RM21.80 a share. Apart from the gaming and power assets, Tanjong also owns Menara Maxis in KLCC, the TGV cinema chain and the Tropical Islands resort in Germany.

If the gaming unit fetches up to RM2.5 billion as speculated, it would be valued at a forward price-to-earnings ratio (PER) of 26 times for FY2011 ending Jan 31, based on an analyst’s assumption that the division generates RM100 million in net profit. This is relatively pricey compared with peers such as Berjaya Sports Toto Bhd, which is trading at a forward PER of 17 times.

The analyst, who tracked Tanjong closely before it was privatisated, however, said that the acquisition PER could be potentially lower, as her forecast for Tanjong’s gaming earnings included an RM80 million loss before interest and tax at the racing totalisator (RTO) business.

Tanjong is believed to be in discussions with the government to reduce this loss, which she believes could be halved in FY2012.

Stripping out the value of the gaming unit at RM2.5 billion plus the estimated market value of TGV and Menara Maxis and ascribing no value to Tropical Islands, the residual value of Tanjong’s power division (including its local and overseas operations) works out to RM8.87 billion, according to the analyst’s estimate. This translates into a PER of 10.7 times for FY2011.

If the gaming business is sold for RM2 billion (at a PER of 20.9 times), the power division would then be valued at RM9.37 billion, or a forward PER of 11.3 times, she estimates.

At a forward PER of 10.7 times or 11.3 times, the implied valuation of Tanjong’s power assets would be very attractive compared with peers such as YTL Power International Bhd, which is trading at around 15 times.

That suggests the power assets, if they are later sold or re-listed, should fetch a handsome premium.

Judging from Ananda’s historical business strategy, a re-listing of Tanjong is possible in the future, although it will likely consist of just the power assets.

Assuming Tanjong’s power division is priced at 15 times PER, similar to its peers, a re-listing of the firm could fetch a market value of about RM12.5 billion.

As such, the re-listing of the power asset could potentially bring in a cool total profit of some RM3 billion to RM3.5 billion for Ananda, or a return on investment of between 25% and 29%.

As at FY2010 ended Jan 31, Tanjong’s overseas power assets accounted for 42% or some RM1.5 billion of the total group revenue and 28% or RM557 million of group operating profit.

For FY2011, they are estimated to collectively contribute net profit of RM832.5 million.

Tanjong’s power plants are located in Malaysia, Egypt and Bangladesh. The group also owns associate stakes in power plants in Pakistan and Sri Lanka, as well a stake in a power cum water desalination plant in Abu Dhabi. Total production capacity of the local power plants is 1,490MW and the overseas power plants 2,461MW.

Gaming earnings pulled down by RTO losses

Tanjong’s gaming segment comprises numbers forecast totalisator (NFO) and racing totalisator (RTO) businesses.

Although the NFO division has been performing reasonably well, its RTO business has been in the red due primarily to the escalating totalisator expenditure incurred and charged by the turf clubs. Tanjong is believed to be in discussions with the Ministry of Finance, Malaysian Totalisator Board and the three turf clubs about the issue.

For FY2010, the NFO generated an operating profit of RM234.9 million, in contrast to the RM65.8 million operating loss incurred by the RTO business.

At the earnings before interest, taxes, depreciation and amortisation (ebitda) level, Tanjong’s NFO business has been growing healthily from RM173 million to RM244 million from 2006 to 2010, with a compound annual growth rate of 7.12%.

On the other hand, the RTO business’ operating loss of RM65.8 million in FY2010 was more than twice the RM26.9 million loss recorded in the year earlier.

This caused a drop in operating profit for Tanjong’s gaming segment as a whole, which fell by RM41 million or 19.52% to RM169 million, from RM210 million.

It is believed that Tanjong’s gaming arm, Pan Malaysian Pools Sdn Bhd, is estimated to have about 24% market share, the lowest among the three players. Berjaya Sports Toto Bhd has a market share of about 40% while Magnum Corp Bhd has about 36%.

With Ananda having made a considerable profit from the privatisation and re-listing of Maxis Bhd, the carving up of Tanjong plc’s gaming and power assets could well follow that trend.

In the past year, Ananda has overseen the re-listing of Maxis Bhd and three privatisations — Tanjong plc, Astro All Asia Networks plc and Measat Global Bhd.

Next up is the planned re-listing of oil and gas services firm Bumi Armada, which was privatised back in 2003.

It has certainly been a busy — and very profitable — year for the reclusive tycoon. - by Yantoultra Ngui Yichen