Tanjong plc  (July 1, RM17.30). Upgrade to buy at RM17.44 with a higher target price of RM18.66 (from RM18.08): Tanjong recorded a 1QFY11 net profit of RM177.2 million (-7% year-on-year), which was within expectations as it comprised 25% of our earnings estimate and 26% of consensus estimate. 1QFY11 revenue of RM945.8 million (-3% y-o-y) was also within expectations at 24% of our FY11 estimate. The 1QFY11 dividend per share (DPS) of 20 sen less 25% tax (1QFY10: 17.5 sen less 25%) declared was a pleasant surprise given the y-o-y easing in earnings.

1QFY11 power generation Ebit (earnings before interest and tax) declined 10% y-o-y to RM238.4 million due to a stronger ringgit against the US dollar, which caused its overseas power plants to contribute RM15 million less, and non-recurrence of RM10 million in warranty claims received in 1QFY10. Gaming Ebit for the quarter dipped 24% y-o-y despite two additional draws and below a theoretical prize payout ratio of 63% due to 9% poorer NFO (numbers forecast operation) sales per draw and additional special contributions (three additional special draws).

Sequentially, 1QFY11 net profit surged 54% quarter-on-quarter because of the lower prize payout ratio of 63% (4QFY10: 69%) and improved visitorship and cost control at Tropical Island. At the theoretical prize payout ratio of 65% to 66%, we do not believe 1QFY11’s results will be repeated in 2QFY11. We trim our earnings estimates to reflect a stronger US dollar-ringgit exchange rate of RM3.30 (RM3.50 previously). The net impact is to trim our earnings estimates by 12% per year.

Despite trimming our earnings estimates, we tweak our discounted cash flow based target price higher by 3% to RM18.66 (previously RM18.08) for housekeeping changes post the release of its latest annual report. Coupled with an expected 75.8 sen net DPS for FY11, we expect Tanjong to yield 11% returns. Thus, we upgrade the counter from hold to buy. Re-rating catalysts include securing a new lotto game and overseas power plants. At only 0.9 times net gearing, Tanjong is able to gear up to embark on M&A. We expect low-beta and high-dividend-yielding stocks like Tanjong to outperform in volatile markets. — ECM Libra Research