THE BUZZ
Yesterday, Tanjung Offshore (Tgoff) announced that it is rationalizing its business by: (i) disposing 100% equity in Tanjung Kapal SB (TKS) which owns 16 offshore support vessels to major shareholder Ekuinas, and (ii) re-organizing its non-marine business.
OUR TAKE
Rationalization plan.Tgoff has entered into a conditional agreement with Kota Bayu Ekuiti SB (KBE) ' a 100%-subsidiary of E-Cap (Internal) One SB (E-Cap) that in turn is a major shareholder of Tgoff with a 24% equity stake ' for the disposal of 100% or 10.0m shares in TKS to KBE for RM220.0m. On top of this RM220.0m, TKS will also settle the advance from Tgoff worth RM43.8m. Upon the completion of this deal, Tgoff will distribute RM130.0m or RM0.44/share to its shareholders and it will be left with only the non-marine business. Also, E-Cap will offer Tgoff shareholders redeemable convertible preference shares (RCPS) of RM0.01 held in KBE at an offer price of RM1.00/RCPS to enable Tgoff shareholders to participate in the growth of TKS (which is Tgoff's offshore support vessel division). This will be done within the period of less than 3 months from the RM130.0m cash distribution date. In fact, E-Cap intends to list KBE on the Main Market of Bursa Malaysia within 2 years from the issue of RCPS and the existing RCPS holders would be able to convert the RCPS into KBE's shares at 1:1 ratio at RM1.00.
Purchase of TKS at PER of 7.2x and PBR of 1.1x. TKS is principally involved in providing ship management services to the O&G industry. As at 31 Dec 2011, both its net profit and net asset stood at RM30.4m and RM207.7m respectively. The purchase consideration offered is reasonable and well within the industry averages.
Tgoff will be left with only non-marine businesses. Tgoff's remaining businesses include: (i) equipment, (ii) engineering, and (iii) maintenance services. To achieve better efficiency for the overall group moving forward, Tgoff would need to undergo closure of non-core businesses, closure of loss-making businesses, rightsizing of manpower and further streamlining of organization structure. Also, it is prohibited from operating in any business which competes with that of TKS within a 3-year period.
Utilization of RM220.0m proceeds. The proceeds from the sale would be used in this manner: (i) RM130.0m for the proposed distribution, (ii) RM89.0m for working capital and non-marine business expansion, and (iii) RM1.0m for disposal expenses.
Maintain Sell. We are keeping our FY12-FY13 forecasts unchanged for now and hence, its fair value too (pending a meeting with the management). Without its vessel business, we believe Tgoff would have lost about 70% of its profit, assuming that all its other businesses are profitable too. However, this exercise would probably be good for its longterm survival as it enables the company to focus on its non-marine businesses (with the aim of turning them around) as well as repay some of its borrowings.