Cheim said last month that Tanjung was mulling re-listing its power division

In 2003, Tanjong took its power arm, Powertek Bhd, private. The years since have seen the division grow by leaps and bounds, most recently in May when Tanjong beat off competition from around the world to purchase seven power plants from CDC Globeleq for a total of US$493mil (RM1.68bil, at the time of purchase).

Reports place Tanjong's total effective installed and operating capacity at up to 3,844MW, taking into account the two power plants the company acquired in Egypt last year. However, like many other conglomerates, Tanjong has operations in a variety of sectors.

The company is also one of three number forecast operators (NFOs) in Malaysia, along with Magnum Corp Bhd and Berjaya Sports Toto Bhd (BToto), having made its initial foray into gaming via the acquisition of Pan Malaysia Pools Sdn Bhd (PMP) in 1991.

With expansion plans very much a part of the picture, the counter has been generating some interest, especially on the back of market chatter that Tanjong's management is seeking to unlock further value from its businesses. A re-listing of its power division has long been a possibility, although there may be other means to streamline the company's operations.

ECM Libra Avenue has come up with an interesting bit of prospective strategy for Tanjong. In a report last week, the investment house weighs the merits of Tanjong selling its gaming assets - and has quite a bit to say on the matter.

First off, ECM points out that regulatory barriers limit the growth prospects of the local NFO industry, forecasting lacklustre growth of just 4% per annum over the next three years for PMP.

In addition, it notes that although Tanjong started out with gaming as its principal business segment, power generation has grown rapidly to the point that it is expected to rise to above 60% of the group's profit before tax over the next two years.

Gaming, meanwhile, is expected to contribute just 25% of that figure, down from over 50% five years ago.

Good cash flows

ECM also feels that it would be quite challenging for PMP to capture more market share and generate growth, given operational constraints that see it lag behind its NFO peers in terms of number of outlets and turnover.

The research house values PMP at RM2.6bil, adding that Tanjong could potentially demand a higher price due to the scarcity of NFO licences available in Malaysia.

"We believe that if Tanjong were to look into disposing PMP, existing NFO players are most likely to be approached as the approvals needed would be much less complex as these are existing gaming players. Moreover, the buyer of PMP could eventually clinch the market leader spot within the local NFO industry," says ECM.

BToto and Magnum have an almost equal share of the market, around the 38% mark, and if either one was to acquire PMP, it would be propelled into the position of undisputed market leader.

ECM also reckons that the purchase would enhance earnings per share by 46% and 53% respectively, although both companies' gearing levels would also increase.

Asked if the other NFOs would be interested in purchasing PMP, Aseambankers head of research Vincent Khoo replies with an ebullient "Sure!".

However, he points out that the pricing of the deal will be important, as gaming is seen as a stable, cash-rich industry.

Put quite simply, ECM reckons that Tanjong could net disposal gains of some RM2.58bil from selling PMP, which would also see its net gearing decline from 1.5x to 0.3x. The research house also posits that Tanjong could utilise the proceeds to grow its power division.

The big question, then, is simply this - Is a one-off gain sufficient to make up for the loss of a division that is a steady cash generator? An OSK Research analyst doesn't think so, and comes up with some compelling reasons for Tanjong to hang on to PMP.

"Yes, from a growth perspective it may be unexciting, but it's not about earnings growth, it's about steady cash flow," he says.

"There are very good cash flows to be had from gaming. In fact, NFO cash flows help fund 80% of Tanjong's dividend payouts. This gives the company the flexibility to conserve cash from its operations, which it can then reinvest into additional power assets."

The issue with gaming

The analyst goes on to say that in a mature, oligopolistic market such as the local gaming industry, market share can only be won at the expense of another company. Therefore, with the likes of Magnum and BToto firmly entrenched in their respective segments, he feels that Tanjong has brighter prospects in terms of longer-term growth.

"There is also likely to be some form of cannibalisation. For starters, NFO outlets are often located within close proximity of one another, so it may not be synergistic from that aspect. Secondly, selling PMP to either Magnum or BToto would see an overall decline in legal NFO revenue, and if punters are spending less, the government will get lower tax revenues," he adds.

Still, there's more to the story. When viewed in the context of Tanjong's plans to expand its power-generating horizons, particularly when venturing into the predominantly Islamic Middle East, dissociating itself from gaming operations may help remove a potential bugbear.

Of course, there are other routes to follow, including the possibility of separating and listing its power and gaming divisions.

A foreign research house reckons that the latter approach would be sensible, citing Tanjong's conglomerate status as being potentially off-putting for potential investors while generating analytical difficulty that results in unflattering valuations and higher risk premiums.

In addition, the house points out the significant difference between the profiles of investors seeking involvement in the power and gaming sectors respectively, adding that this arrangement would remove potential social issues regarding exposure to the gaming sector while allowing the power division direct access to capital markets that would help fund Tanjong's expansion drive.

Spinning off power

Just last month, Tanjong chairman Robert Cheim Dau Meng told reporters that the company was mulling re-listing its power division, with the London Stock Exchange and the local bourse mentioned as possible destinations. Since then, the possibility has been much discussed amongst market watchers.

An analyst from TA Securities feels that the market won't pay too much attention to the one-off gain Tanjong would obtain from spinning off its gaming division. Instead, he lends support to the notion that listing the company's power division would make more sense.

"At the moment, all of Tanjong's businesses are held under the one holding company. This means that the likes of the Employees Provident Fund cannot invest in the company at the moment because of its exposure to gaming. Therefore, spinning off the power division would expose it to a wider pool of investors."

The analyst adds that a listing in Britain would help unlock value in Tanjong's power assets, explaining that the price earnings ratio (PE) for utilities listed in Britain is around 12 times (x) to 13x, compared to an average PE of some 10x in Malaysia.

"Listing the power division in Britain would help extract more value from the initial public offering, as it could be listed at a PE of 15x," he sums up.

ECM concurs, pointing out that at its current price level, the power segment is underappreciated by the market, with an implied PE of only 8x to 10x going by the 2008 and 2009 financial years, an inferior valuation if compared with other listed power players.

With its sights firmly set on expansion and unlocking value, Tanjong has quite a few operational decisions to make in the near future. For the time being, whatever it does, it's certainly going to make for compelling viewing.