TANJUNG Offshore posted weak results for the second quarter of 2009 (2QFYDec2009), falling short of expectations due to an unexpected loss at its UK-based subsidiary, Citech Energy Recovery Systems UK Ltd.
Citech reported a loss of £1.4 million, or about RM8.02 million, due to cost overruns and late delivery charges incurred in the manufacturing of waste heat recovery units. Tanjung had acquired the company in August 2008.
Due to these steep losses, Tanjung's pre-tax profit for 2Q09 halved year-on-year (y-o-y) to RM4.2 million, and fell some 63% from RM11.4 million in 1Q09. Excluding Citech's losses, profits for the quarter would have been flat and in line with our earlier expectations.
Revenue for the quarter doubled y-o-y to RM171.7 million, while net profit fell 64% y-o-y to RM2.8 million. For the first half of 2009 (1H09), revenue doubled to RM358.5 million, pre-tax profit rose 9.4% to RM15.6 million while net profit declined 3.9% to RM12.7 million.
The significant increase in revenue was due largely to the expansion of its marine vessel fleet — from seven to 11 vessels, with the delivery of MV Tanjung Puteri 1, MV Tanjung Puteri 2, MV Tanjung Gaya and MV Tanjung Gelang. There was also an increase in the supply of engineering equipment contracts. However, they could not offset the impact of Citech's losses.
Over the last quarter, Tanjung's net debt increased from RM398.5 million to RM448.7 million in June 2009 due to funding for its five new vessels, which will be delivered ahead of schedule. While gearing is high at 137%, they are manageable as the bulk of borrowings is long term and used to fund its vessels, which have matching cash flows from long-term charters.
Positive industry outlook
Crude oil prices have doubled from 4Q08's lows to around US$74 (RM261.22) per barrel. We expect crude oil prices to stay relatively high due to fears over inflation and the weakening US dollar, although this may be tempered by US regulatory proposals to limit commodities trading to curb speculation.
With crude oil prices significantly above the "breakeven" level of US$40 per barrel for viable oil and gas exploration activities — and expected to remain high — the outlook for oil and gas-related companies has also improved markedly.
Tanjung focuses on vessels and shallow water exploration-related services where breakeven levels are even lower and there is stronger demand. Its vessel charter rates have also remained stable at US$1.90-US$2 per bhp, despite the volatility in crude oil prices and other shipping rates.
But Citech will remain a drag
Unfortunately for Tanjung, losses at its UK arm Citech dragged earnings down sharply in 2Q09, and will likely continue to do so until 2Q10.
While Tanjung has beefed up vigilance and management efforts at Citech, whose plant is located in Hull, we understand the losses will continue for the next year due to variation orders, late delivery charges and cost overruns on existing orders, as well as other expenses.
We are factoring in losses of RM25 million from Citech for the full year (with approximately RM8.1 million already recorded in 2Q09) and a further RM15 million of losses in 2010.
Malaysian operations faring well
Notwithstanding the unexpected problems and losses at Citech, Tanjung's Malaysian operations continue to fare very well.
Tanjung currently has a fleet of 11 vessels, including MV Tanjung Gelang, which was delivered in May 2009. Its pipeline of five new vessels will be delivered well ahead of schedule.
The company is thus assured of locked-in earnings over the next few years, from the vessels as well as its maintenance order book, two oil rig contracts (SERF and THE 208) which are for a duration of 3.5 to five years, and a Mobile Offshore Production Unit (MOPU).
Out of the 11 existing vessels, 10 vessels are on long-term charters of typically three to four years (except for MV Tanjung Gelang which is for a year), while MV Tanjung Manis (leased to Exxon Mobil) remains on spot charter basis.
Tanjung has another five vessels on order, which will bring its fleet size to 16 by the end of this year. The five new vessels will be delivered well ahead of schedule — of up to a year.
Three of the new vessels — MV Tanjung Biru 1, MV Tanjung Dahan 1 and MV Tanjung Sari — will be delivered by end-October 2009. The remaining two — MV Tanjung Biru 2 and MV Tanjung Dahan 2 — will be delivered by end-November 2009, as compared with the earlier target of early 2011.
Earnings forecasts reduced
Despite the five vessels being commissioned well ahead of schedule, they will not be able to offset completely the losses at Citech. We expect net profit to decline to RM20.5 million in 2009, compared with RM32 million in 2008. For 2010, we expect net profit to improve to RM31 million.
We remain optimistic of Tanjung's longer-term growth prospects. However, continued losses at Citech could affect investor sentiment in the coming quarters until signs of a turnaround there are evident. At RM1.31, its shares are trading at price-to-earnings (P/E) of 15.8 and 10.4 times for 2009-10 and around its latest book value of RM1.34.
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