TANJUNG Offshore (RM1.23) is set to post a strong earnings recovery in 2010 as it puts its UK losses behind it and benefits from rising income from its fleet of vessels, including three newly delivered ones that have secured long-term charters. The company had also recently been awarded a number of new contracts, after a relatively quiet 2H2009 for the domestic oil and gas industry.
Just this month alone, Tanjung secured a RM70 million wellhead maintenance contract from Petronas Carigali, a RM4 million spare parts supply contract from Murphy Sarawak Oil Co and most significantly, a RM150 million charter contract for three new vessels from Petronas Carigali.
In early January 2010, Tanjung took delivery of three new AHTS (anchor handling tug supply) vessels namely, MV Tanjung Biru 1, MV Tanjung Biru 2 and MV Tanjung Sari. It has secured long-term contracts for the three vessels from Petronas Carigali for the tenures of three-six years. The contracts are valued at around RM150 million and will commence in March 2010.
We understand the charter rate is equivalent to about RM32,000 per day, or US$1.75-US$1.80 (RM5.90-RM6.10) per bhp (brake horsepower), similar to its earlier long-term charters. The charter period is longer than the usual three-year norm, which is positive for Tanjung.
Tanjung focuses on smaller vessels for shallow water exploration-related services where breakeven levels are even lower and there is stronger demand. As such, charter rates for this segment of the market have stayed relatively resilient compared with larger vessels for deepwater exploration activities.
On a macro level, the outlook for oil exploration activities is looking more positive with crude oil prices trading at over US$80 per barrel, well above the "breakeven" level of around US$40 per barrel for viable oil and gas exploration activities.
With these new vessels, Tanjung now has a fleet of 14 offshore support vessels. Another two vessels — MV Tanjung Dahan 1 and 2 — are scheduled to be delivered at end-February 2010, bringing its total fleet size to ultimately 16 vessels.
Of its current 14-vessel fleet, 12 have already secured long-term charters while two (MV Tanjung Manis and MV Tanjung Huma) are on spot charters for strategic reasons. We understand one of them may be converted to long-term charter. The secured charters will provide Tanjung with assured income streams over the next few years, with 2011 to see the full-year impact.
Strong earnings turnaround in 2010
Tanjung's earnings will recover strongly in 2010, with catalysts coming from the enlarged fleet size and also more importantly, the cessation of losses at its UK subsidiary, Citech Energy Recovery Systems UK Ltd. 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.
Recall that Citech started posting large unexpected losses in 2Q2009 and 3Q2009, which severely dampened Tanjung's earnings in the two quarters, including a quarterly net loss of RM10.3 million in 3Q09. These losses had reduced Tanjung's nine-month (to September 2009) cumulative pre-tax profit to RM6.8 million and net profit to just RM2.5 million.
After losing £1.4 million (RM7.6 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.
Positively, we understand losses have narrowed and will cease in 2010 after a large restructuring effort. We understand Citech's losses reduced further in 4Q09 and are likely to have stopped, except for ongoing operational costs. Citech has reviewed its workforce, retrenched staff and closed a fabrication unit, and these one-off charges will be reflected in 4Q09.
As a result, Tanjung's results for 4Q09 — to be released by end February 2009, are unlikely to excite, but the group will still be marginally positive. Notwithstanding Citech's 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.
With losses from Citech stemmed and an expanded fleet size, Tanjung will see a strong earnings outlook in 2010. We maintain our forecasts. We expect Tanjung's 4Q09 to return to the black, albeit marginally, with full-year net profit of RM3.9 million for 2009. For 2010, we expect net profit to rebound to RM33.3 million as losses narrow from Citech (we have conservatively provided for RM5 million of losses in 1Q10) and the five new ships start contributing fully.
At RM1.23, its shares are trading at attractive price-to-earnings (P/Es) of 9.1 and 7.6 times for 2010-11, and below its latest book value of RM1.29, with largely secured earnings.
The Citech losses have adversely affected sentiment for Tanjung's shares, but we note that the stock has also bounced off its lows. Investors should look past the Citech losses and towards 2010-11, when earnings will recover strongly. Barring further unexpected developments, its longer-term growth prospects remain intact, anchored by stable income from its marine vessels.
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.