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

(TGOFFS opening stock price today (25.4.2012) was 90 sen) 

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.

Source: www.theedgemalaysia.com

Tanjung proposed to sell marine op to Ekuinas for RM 220 million

(TGOFFS opening stock price today (24.4.2012) was 93 sen)

Tanjung Offshore Bhd has proposed to sell its marine business to major shareholder E-Cap (Internal) One Sdn Bhd for RM220mil under a demerger exercise.

In a filing with Bursa Malaysia, Tanjung Offshore said it had entered into a conditional agreement for the purchase and sale of shares with Kota Bayu Ekuiti Sdn Bhd (KBE), a wholly-owned by E-Cap, which in turn is a major shareholder of Tanjung Offshore, for the disposal by Tanjung of 10 million ordinary shares of RM1 each in Tanjung Kapal Services Sdn Bhd (TKS), representing the entire equity interest in TKS, to KBE for a cash consideration of RM220mil.

E-Cap is wholly-owned by Ekuinas Capital Sdn Bhd, which in turn is a wholly-owned subsidiary of Yayasan Ekuiti Nasional, which also has 100% equity interest in Ekuiti Nasional Bhd.

Additionally, TKS would also settle the advances from Tanjung Offshore of about RM43.8mil.

“Tanjung intends to distribute approximately RM130mil out of the total proceeds arising from the proposed disposal to its shareholders,” it said.

Upon completion of the proposed disposal, the business that remains within Tanjung Offshore would be the non-marine business, comprising the equipment, engineering and maintenance services division.

“It is expected that the proceeds from the proposed disposal will assist the group in raising the much-needed funds to turn around the non-marine business which Tanjung is currently undertaking,” it said.

Meanwhile, E-Cap intends to offer the shareholders of Tanjung Offshore, other than E-Cap and/or its affiliates such number of redeemable convertible preference shares (RCPS) of 1 sen each held in KBE which is to be determined based on the aggregate percentage of the total issued and paid-up capital held by the remaining shareholders as at an entitlement date to be determined (OFS entitlement date), multiplied by the value of RM220mil, at an offer price of RM1 per RCPS on a non-renounceable basis based on the shareholdings of the remaining shareholders in Tanjung Offshore at the OFS entitlement date.

“The proposed offer sale is intended to allow the remaining shareholders to continue to participate in the future growth of TKS.

“E-Cap intends to seek a listing of KBE on the Main Market of Bursa Malaysia, the timing of which has not been determined at the date of this announcement but, in any event, shall be within 24 months from the date of issue of the RCPS, subject to obtaining all relevant approvals,” it said.

Tanjung Offshore said although its non-marine business was the major contributor to the group in terms of revenue, the non-marine business had been loss-making since 2009.

“Given the performance of the non-marine business coupled with the need to raise funds to meet the immediate funding requirements of the group for future expansion of the non-marine business, the company is embarking on the group rationalisation plan which entails, inter-alia, the proposed disposal after due consideration of other methods of raising funds given the capital structure of the company, financial position of the group as well as the performance of Tanjung shares.”

It added that with the proposed disposal, Tanjung would be able to address the immediate funding requirements of the group in view that the group’s ability to bid for jobs for the non-marine business in the near term was restricted by its tight cashflow position and high gearing level, especially with the recent shutdown of Citech Energy Recovery Systems UK Ltd.

Source: www.thestar.com.my