Tanjong - 1Q FY10 core net profit up 38% YoY; inexpensive valuations

Excluding the disposal gain of RM62 mn in 1Q FY09, Tanjong’s 1Q FY10 core net profit rose by 38% YoY. EBIT growth of 25% was mainly driven by a 33% increase from the ‘power’ division.

It maintained a first quarter net dividend of 17.5 sen. We estimate that its full-year net dividend yield will amount to 5.5%.

Tanjong is seen as a defensive company, and therefore, has a beta of 0.8x. We estimate that 78% of Tanjong’s EBIT is derived from the regulated power division.

However, there is another attempt to renegotiate power purchase agreements (PPAs) in Malaysia. Any attempt to renegotiate the PPAs will create ‘noise’ in the industry, but we believe that the sanctity of the PPAs will be preserved.

Maintain OUTPERFORM with a target price of RM15.20. Valuations are attractive – Tanjong is trading at FY10E P/E of 8.6x and FY11E P/E of 7.7x, which are at some a 45% discount to the Malaysian market valuations. It is trading close to the bottom of its historical P/E trading range.