Tanjung Offshore - Engineering division may yet stall recovery

We maintain our SELL rating on Tanjung Offshore (Tanjung) with an unchanged fair value of RM0.71/share, pegged to a fully-diluted FY12F PE of 12x – at a 25% discount to the oil & gas sector’s average of 16x. 

Tanjung’s FY11 results came in below expectations, recording a loss of RM55mil vs. our loss estimate of RM25mil and street’s RM5mil. The group did not declare any dividend for FY11, as expected.

While the group chalked in RM30mil (GBP6mil) closure costs at its Citech operations in the UK, as forewarned by our report on 13 February this year, Tanjung’s continuing losses from its engineering division and weaker marine operations spilled more losses than even our belowconsensus projection. 

The engineering equipment supply division’s 4QFY11 loss rose to RM33mil from just RM3mil in 3QFY11 due to insufficient new orders to compensate for completed projects and impairment of receivables due to poor execution. While vessel utilisation was stable at around 88%, this segment’s 4QFY11 EBIT still declined 18% QoQ  to RM13mil due to the dry docking of two vessels. 

Currently, just two vessels are on spot charters, i.e. Tanjung Gelang, a well-testing vessel and Tanjung Manis, a utility supply vessel. With Petronas expected to award the next batch of charter contracts for 17 vessels in March 2012, we expect the group’s remaining vessels to be secured on a long-term basis by 2Q2012.We maintain FY12F-FY13F earnings as we expect some earnings improvement after its ‘kitchen-sinking exercise’. But we expect recovery in 1HFY12 to be still slow, given the slow pace of order accretion for Tanjung’s engineering equipment supply division, which we understand has a high-cost structure. We introduce an FY14F net profit with a growth of 26% based on a 10% increase in engineering/equipment sales.

With a tender book of RM850mil, the group’s total order book stands at an estimated RM558mil currently comprising RM300mil for marine charter, RM120mil equipment, RM88mil maintenance and RM50mil for Mobile Offshore Production Unit services. 

We expect an earnings recovery from the absence of Citech losses in 1HFY12, but it is unlikely to be significant enough to justify a re-rating at this juncture due to the group’s high-cost engineering division. 

Tanjung is currently trading at a demanding fully-diluted FY12F PE of 16x. Although it is trading at an undemanding P/BV of 0.9x, we will review our rating pending a sustained recovery in its engineering division.

Source: AmeSecurities