- 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.

- We are negative on Tanjung's proposed 'demerger' exercise, which is expected to be completed by endAugust this year, for its entire fleet of 16 offshore supply vessels (OSV) to Ekuiti Nasional (Ekuinas), which has a 24% stake in Tanjung. Its proposed exit from the group's only profitable business for the past years stems largely from cash flow issues arising from its high net gearing of 1.7x.

- The proposed exercise involves the sale of the OSV division under Tanjung Kapal Services (TKS) for RM220mil (based on a fair FY11 P/E of 9.4x, EV/EBITDA of 7.6x and P/BV of 1.3x) and debt repayment of RM43mil back to Tanjung. This also involves a proposed dividend distribution of RM130mil (44 sen/share) and a rights offer to Tanjung's existing shareholders to subscribe for redeemable convertible preference shares (RCPS) in TKS, which is expected to be listed during its 2-year tenure. 

- The dividend distribution is sufficient to cover 59% of TKS' RCPS, which has an issue and conversion price of RM1.00/share and redemption of 110% upon maturity. Post-corporate exercise and dividend distribution, Tanjung's shareholders' fund will drop by half to a fullydiluted book value of RM0.46/share but with a net cash position of RM76mil which is earmarked for the remaining 3 divisions:- -i) maintenance (includes aftermarket services); ii) engineering products-engineered products, small fabrication and manpower; and iii) products &services (agency trading and small/marginal field services).

- As part of its ongoing rationalisation exercise, the group plans to close its multiple loss-making sub-divisions such as UK-based Citech, Tanjung PetroConsult, PT Tanjung Offshore Nusantara and Tanjung Control Systems & Instrumentation. It projects an FY12F revenue of RM200mil supported by an order book of RM250mil with a net margin of 10%. Conservatively, we maintain FY12F-FY14F earnings.

- 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. Also, investors will not wish to be locked-in for 2 years in an unlisted OSV vehicle, even though Ekuinas plans to inject other vessels in TKS at a later stage.

- But with only 8% of Tanjung shareholders required to vote in favour to cross the 51% approval threshold (including Omar Khalid's 33% but excluding Ekuinas' 24%), we expect this exercise to be carried out eventually.  

- Tanjung is currently trading at a demanding fully-diluted FY12F PE of 16x, compared with Alam Maritim's 8x.