OIL and gas player Tanjung Offshore (98.5 sen) posted another set of poor results for the third quarter of FY2009 (3QFYDec09), with an unexpected quarterly net loss of RM10.3 million. These losses have reduced Tanjung's nine-month pre-tax profit to RM6.8 million and net profit to just RM2.5 million.
This comes as losses at its UK subsidiary, Citech Energy Recovery Systems UK Ltd, accelerated. Citech has been the source of the group's recent poor performance since 2Q09. As highlighted in the last quarter, Citech's losses only came to light unexpectedly in 2Q09. They were due to cost overruns and late delivery charges incurred in the manufacturing of waste heat recovery units.
After losing £1.4 million (RM7.8 million) in 2Q09, Citech's losses accelerated in 3Q09 with another loss of £2.7 million, exacerbated by restructuring and staff severance costs as it reshuffled the unit's management. In two quarters, it has lost £4.1 million or RM23 million from this unit.
In addition, we understand Tanjung also suffered losses of about RM3 million in the quarter from two subsidiaries involved in producing controlled panels for platforms under its equipment packaging division, due to lower sales. The subsidiaries traditionally yielded RM2-RM3 million profit per quarter.
Notwithstanding the Citech problems, Tanjung's Malaysian shipping operations continue to fare well, supported by a pool of assured income from its growing fleet of marine vessels and stable long-term charter rates.
As at September 2009, the company had a fleet of 11 marine vessels. The number will rise to 16 by the end of the year following the delivery of five new vessels in 4Q09, of which one, MV Tanjung Biru 1, has been delivered in October 2009.
Citech's large losses
The acquisition of Citech, which specialises in producing gas turbine heat recovery units to recover heat from turbine exhaust systems, has turned out to be a major mistake for Tanjung.
Citech's large losses
The acquisition of Citech, which specialises in producing gas turbine heat recovery units to recover heat from turbine exhaust systems, has turned out to be a major mistake for Tanjung.
Citech was acquired for RM2.5 million just in August 2008, plus assumption of RM8.8 million in debts. Just over a year later, Tanjung is now saddled with unexpected large losses of around RM35-RM40 million from this unit.
Further losses are expected from Citech in 4Q09, but the amount is likely to be halved from 3Q09 as the losses were exacerbated by one-off restructuring costs, including retrenchments and severance payments for the unit's previous management.
On a positive note, a large part of the losses has already been booked in and management now aims to break even in 1Q10 instead of 2Q010.
Total losses this year from Citech are expected to be around RM35 million. We have assumed further — but final — losses of RM5 million in 1Q10.
Earnings recovery expected in 2010
We expect Tanjung's 4Q09 to return to the black, albeit marginally. Citech's losses will be lower and the equipment packaging division is expected to return to profitability. However, full-year earnings for 2009 will be significantly affected by Citech's large losses.
We now expect full-year net profit of only RM3.9 million for 2009, compared with our earlier forecast of RM20.5 million. For 2010, we expect net profit to rebound to RM33.3 million as losses narrow from Citech and the five new ships start contributing fully.
The Citech losses will adversely affect earnings and investor sentiment for Tanjung this year. Barring further unexpected developments, its longer-term growth prospects remain intact, anchored by stable income from the fleet of 16 vessels.
Tanjung's share price has slumped after the problems at Citech first emerged. At 98.5 sen, its shares are trading at price-to-earnings (P/Es) of 7.3 and 6.1 times for 2010-11, and below its latest book value of RM1.29.
Marine vessels faring well
The problems at Citech mask the fact that Tanjung's Malaysian shipping operations are faring well. In 3Q09, the company had a fleet of 11 vessels. This has increased to 12 with the delivery of MV Tanjung Biru 1 in October 2009.
Another vessel, MV Tanjung Sari, will be delivered at the end of this month. Three more vessels (MV Tanjung Biru 2, MV Tanjung Dahan 1 and MV Tanjung Dahan 2) are scheduled to be delivered by end-December 2009. In total, its fleet size will expand to 16.
These vessels are being delivered up to a year ahead of schedule. Thus, Tanjung is assured of strong earnings next year from the rise in fleet size and locked-in earnings from its long-term vessel charters.
Of Tanjung's existing fleet (excluding the newly delivered Tanjung Biru 1), all are on long-term charters of typically three-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 focuses on vessels and shallow water exploration-related services where breakeven levels are even lower and there is stronger demand. We understand charter rates have remained stable at US$1.80-US$2 (RM6.10-RM6.78) per bhp, compared with a fall in rates for deep-water vessels.
On a macro level, the outlook for oil exploration activities is positive with crude oil prices are trading at just under US$80 per barrel, driven by the depreciating US dollar and inflationary expectations and speculative "carry trades". This is well above the "breakeven" level of around US$40 per barrel for viable oil and gas exploration activities.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
