25 April 2012
Tanjung Offshore divestment of the group’s only profitable business raises question on its earning prospects going forward, despite declaring special dividend of up to 44.4 sen per share to return part of the proceeds- AmResearch and OSK Research comments
Tanjung Offshore Bhd’s exit from the offshore supply vessels (OSV) business may be deemed necessary to pare down its borrowings. However, the divestment of the group’s only profitable business raises question on its earning prospects going forward.
This explains why investment analysts still maintain their “sell” calls on the stock despite Tanjung declaring special dividend of up to 44.4 sen per share to return part of the proceeds from the sale of its OSV business to Ekuiti Nasional Bhd (Ekuinas) for RM220 million.
Shares in Tanjung did not react much to the proposed divestment. The share price fell 3.2% or three sen yesterday to close at 90 sen.
AmResearch in a report said the proposed exit from the group’s only profitable cash business stems largely from cash flow issues arising from Tanjung’s high net gearing of 1.7 times.
“In our view this corporate exercise benefits Ekuinas at the expense of Tanjung, which will be exiting the OSV business at the bottom of the market cycle as vessel utilisation and charter rates are on an upward trend,” said AmResearch.
OSK Research pointed out that without its OSV business, Tanjung would have lost about 70% of its profit, assuming that all its other businesses are profitable. “However, this exercise would be good for its long-term survival,” it said.
As at end-2011, Tanjung’s net debt totalled RM537.9 million, against its shareholders’ fund of RM323.3 million. The company incurred a net loss of RM55.4 million for the financial year ended Dec 31, 2011 (FY11).
Under the proposed divestment exercise, a new special purpose vehicle called Kota Bayu Ekuiti Sdn Bhd (KBE) funded by Ekuinas will acquire a 100% stake in Tanjung’s marine arm, Tanjung Kapal Services Sdn Bhd (TKS).
Upon completion of the proposed exercise, TKS will own and operate 16 offshore vessels with two platform supply vessels currently on order. Based on its pro forma financial statements for FY11, TKS’ revenue was RM125 million and the adjusted profit after tax amounted to RM30.4 million.
Ekuinas will also inject an additional RM30 million into TKS to fund future working capital requirements. And the private equity fund will ensure that TKS repays Tanjung RM44 million in shareholders’ advances owed.
Tanjung stands to receive RM264 million cash from the proposed divestment, of which half, equivalent to RM130 million, will be distributed back to shareholders in the form of a special dividend. The remainder will go towards growing its non-marine business.
The company’s largest shareholder is its managing director Omar Khalid who holds 33.58%, followed by Ekuinas which has a 24% stake, and Lembaga Tabung Haji (LTH) with 9.97%. From the RM130 million to be distributed to shareholders, Omar stands to gain some RM43 million and LTH RM12.8 million. Ekuinas will receive RM31 million.
Tanjung deems the RM220 million price tag for the OSV business to be fair and well within the industry average at 7.2 times earnings and 1.1 times price-to-book.
There is market talk that Ekuinas is planning to add more ships to its OSV entity, which will eventually be listed over the next two years. Tanjung’s shareholders will also be given the option of investing in KBE via a rights offer of redeemable convertible preference shares, hence benefiting from its IPO exercise.
Ekuinas paid RM99.8 million for its 24% equity stake in Tanjung at RM1.30 per share. Minus the expected dividend of RM31 million, the government-linked private equity fund will invest about RM233 million more to acquire Tanjung’s OSV business.
Ekuinas had previously said it holds a medium-term investment horizon of between three and five years.
Given that it bought into Tanjung nearly two years back, it could be argued that Ekuinas could have come under pressure to realise its investment in the company.