KUALA LUMPUR: AmResearch is downgrading its rating on Tanjung Offshore (Tanjung) to a Sell with a lower fair value of RM1.11 per share based on a price-to-earnings (PE) multiple of 10 times pegged to its FY10F earnings.

Tanjung's earnings for the second quarter ended June 30 were only RM3 million (down 73% on-quarter), bringing 1HFY09 earnings to a disappointing RM13 million.

In 1HFY09, earnings fell 4% despite posting excellent revenue growth (2.0 times on-year) to RM359 million, mainly driven by ongoing charter of 11 vessels against seven vessels last year and the supply of various engineering equipment.

Weak earnings for the quarter is attributable to 1.4 million pound sterling losses incurred by its British-based subsidiary Citech Ltd - due to costs overrun and late delivery charges. Tanjung does not intend to divest this business but is looking to turn the business around by middle of next year.

Tanjung bought 75% of Citech in August 2008 for RM11 million (since increased to 94%). Citech provides “waste heat recovery units” - used in offshore platforms to reclaim
heat from the exhaust of gas turbines, which provide the power required to operate the platform.

Its vessel chartering division will remain as the group's major contributor to earnings with an estimated contribution of 55%-60%.

"We are cutting our earnings estimates by 33%-49% for FY09F to FY11F to RM21 million to RM36 million, which translates to EPS of 8 sen to 14 sen from 18 sen to 23 sen. We have assumed lower EBITDA margins for FY09F-FY11F to 8% to 11% from 14% to 16%," it said.

AmResearch said the management was guiding for lower earnings of RM20 million to RM25 million for FY09F and RM35 million for FY10F given Citech’s operational issues.


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