PE > 200x

As a basic guideline, a price/earnings (PE) multiple of >50x could possibly indicate that a stock is overvalued. However, it may not be the same for a stock with a PE multiple of >200x, if the owner of the company keeps buying the shares from the open market, instead of converting his warrants at a much lower price, to increase his stake in the company in which he already has control. This can also mean something material is brewing and the market is not fully aware of its potential! Curious about the company? Well, it is Tanco Holdings (Tanco) that possesses all these unique traits and has attracted our attention.

Our fact checks revealed that Tanco has obtained a principal-in-approval from the Malaysia Marine Department in January 2024 on a port project proposed by its 79%-owned Midports Holdings Sdn. Bhd., subject to various technical studies and all preliminary conditions that have been set by the Ministry of Transport. Later, it announced a conditional joint venture agreement with Menteri Besar Negeri Sembilan (state government) for the proposed joint development and operations of a smart artificial intelligence container port (AI port) on a sector of submerged land in Dickson Bay, Port Dickson, measuring approximately 83 acres.

Opportunities Aplenty

In a meeting with management recently, we delved further into the AI port specifically on the size and capacity, capex requirement and funding options as well as some regulatory issues. According to management, it will be a port equipped with 5G base stations with comprehensive navigation system to enable autonomous driving. It would be able to handle 5mn TEUs per year, which can be scaled up, if needed. More importantly, management believes that RM2bn, as quoted in the press, is sufficient to complete the first phase of development as the offshore area has a natural topography suitable for the construction of a port with a depth of 20 metres and at 1.85km away from the shore, thereby reducing dredging and land reclamation costs. As far as funding is concerned, management believes it would not be a big issue if the company can establish a strategic alliance with global shipping liners to bring over some throughput from PSA Singapore. Lastly, management is confident of obtaining all approvals from the authorities as the development can spur economic growth, create jobs and more importantly, this will be a privately funded project.

In our modelling (Figure 5), we have predicted a series of revenues and expenses for a period of 20 years, which would yield a project IRR of 10%. Our modelling is premised on key assumptions below with some inputs from management:

• RM2bn is sufficient for AI port development with annual capacity of 5mn TEUs;

• The operation of AI port would rely more on electricity and less on fuel;

• The port development will be completed within a year based on management guidance; and

• The company will be qualified for tax incentives.

All in all, we believe the AI port would be able to get off the ground as the state has a vested interest in this infrastructure project. To propel the state and attract more foreign direct investments (FDIs) to Negeri Sembilan (N. Sembilan), a complete infrastructure support is a prerequisite, which rests in the hand of the governments (Federal & State). In 2023, N. Sembilan contributed to only RM63.3bn, or 3.4% of Malaysia GDP. Comparing with the GDP 10 years ago, N. Sembilan’s GDP grew 81%, which was relatively slow compared to Malaysia’s GDP growth of 91% during 2013-2023. As such, N. Sembilan must catch up and get ahead of other states in drawing FDIs to its industrial parks, in our opinion.

It is interesting to note that Malaysia has over 500 industrial estates with world class infrastructure and excellent connectivity, according to MIDA. N. Sembilan is not lacking one of those, with the well-known being the Malaysia Vision Valley spearheaded by Sime Darby Property. These parks would serve as an important catchment area to feed the port with export/import cargoes. As such, we believe it is economically sensible to have a new container port that would solidify N. Sembilan’s position as a magnet for FDIs.

Potential Challenges

However, the AI port proposed by Tanco is not without its challenges. First, there is a rival port, namely Kuala Linggi International Port (KLIP), which has announced its plan to transform KLIP into a green global industry hub. Essentially, the port is designed to handle liquid and bulk cargoes, but we do not discount the possibility that it will get a slice of share in the container space as well. Moreover, the existing transhipment hubs in Port Klang and Port of Tanjung Pelepas, which already have entrenched positions in Malaysia, can only get better in future with enhanced connectivity via ECRL and the great economic prospect of Johor-Singapore Special Economic Zone. Having said that, management reiterates that the AI port is eyeing for some market share in the Strait of Malacca specifically coming from PSA Singapore, those “green” cargoes in particular.

As at March-24, Tanco’s total shareholders’ fund stood at RM288.2mn with 9MFY24 core profit of RM5.1mn. In our opinion, this relatively small balance sheet with low earnings base would likely impede the company from raising RM2bn for port development, despite having several plots of lands in Port Dickson that are debt-free. These lands (together with properties erected) in Port Dickson (PD land), measuring approximately 380 acres (based on FY23 annual report), have a total carrying value of RM255mn or an implied value of RM15psf. According to iProperty, there are several parcels of industrial land for sales in Port Dickson, asking for RM41psf (Spring Hill Industrial Park) to RM65psf (Jalan Bahru). We are optimistic that the pledge of PD land could possibly raise RM530mn loans if bankers value it at RM40psf with loan-to-value ratio of 80%. All in all, we believe a big part of the RM2bn capex would have to come from equity financing.

Forecast

For 9-month ended Mar-24, Tanco’s core profit slipped to RM5.1mn (-63% YoY), despite a revenue growth of 34.1%. The discrepancy in earnings was due to decrease in progress billing in the property development segment, along with losses from the construction unit. The drop in revenue can be attributed to dwindling property unbilled sales and contraction in construction margin.

Looking forward, FY25-26 earnings would be driven by 1) target launch of RM1bn GDV in 2024; 2) construction order book of RM300mn and job replenishment target of RM250mn, 3) full-year contribution from 50.1%-owned Gplex Properties, one of the top real estate agencies in Malaysia, and 4) maiden contribution from Herbitec, a pharmaceutical company which is undergoing human clinical trials for NODEN for the treatment of dengue. Management expects to obtain a government contract once the trial is completed.

Valuation

Tanco is currently trading at a PE and PB multiple of >200x and 7.2x, respectively. The excessive valuation can only be explained by the AI port development in Port Dickson, which still has a lot of moving parts. A riskadverse investor should continue sitting on the sidelines until AI port is completed.

Our sum-of-part valuation for the company is RM0.70/share (Figure 2). We believe the 50% discount attached to the valuation of AI port has significantly priced in: 1) viability of the project to N. Sembilan, which we believe would receive supports from the federal and state governments in terms of regulatory approval, 2) execution risks that include the project financing required to kickstart the project. In our AI port valuation, we have conservatively assumed the port would have a constant annual capacity of 5mn TEUs (i.e. no expansion), as well as a terminal growth rate of 0% after 2045 (Figure 5). In our bestcase/worst-case scenarios, assuming the AI port can successfully/failed to develop, the indicative SOP valuation would be RM1.30/0.42 (Figure 4). Note that we have omitted Tanco’s pharmaceutical division as the earnings contribution is unmeaningful at this juncture. Non-rated.

Source: TA Research - 25 Jul 2024