Tanjung Offshore; Fully Valued; RM0.925
Price Target: RM0.70; TOFF MK


Tanjung Offshore announced that its wholly-owned subsidiary, Citech Energy Recovery Systems UK Limited (Citech) has commenced the cessation of business operations with effect from 10 Feb 12. Citech is primarily involved in the manufacturing and marketing of waste heat recovery units to major O&G customers in the European and US markets and Tanjung Offshore has invested ''6.70m (~RM26.8m) in Citech. The cessation of Citech's operation is due to the sluggish and highly competitive market which has severely affected its profitability. The company will incur cessation expenses of ''6.70m (~RM24.8m) due to various expenses including termination payment, provisions for warranties on completed projects and other professional fees.

The cessation of operation costs will likely impact its FY11 earnings which were not imputed earlier on. We are currently reviewing our numbers in view of the unexpected cessation expenses. Also, we understand from the company that there could be other provisions related to its engineering business in Malaysia to be booked in its 4Q11 results.

We reiterate our Fully Valued call with RM0.70 TP at this juncture, pending more details on the scale of losses from its engineering division, which may affect the company's cash flow in view of the its debt-laden balance sheet with RM514m net debt (1.4x net gearing) as at Sep11.

Source: HwangDBS Research 13 Feb 2012