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? 1QFY01/11 results in line. Tanjong’s 1QFY01/11 net profit of RM177m (-7.4% yoy; +54% qoq) was within our and consensus expectations, accounting for 25.5-26% of our and consensus full-year estimates.

? Weaker net profit yoy due to power and NFO. 1Q EBIT rose 31.8% qoq largely due stronger contribution from: 1) NFO (+144% qoq), as a result of lower prize payout (estimated 1QFY11: 65% vs. 4QFY10: 72%); and 2) leisure division (1QFY11: RM9.2m vs. 4QFY10 operating loss of RM12.9m) as 1Q tends to be a seasonally stronger period for Tropical Islands. Together with lower finance cost (-29.5% qoq), 1QFY11 net profit jumped 54% qoq (core basis). YoY, net profit fell 7.4% mainly due to: 1) lower EBIT from the power division (-10% yoy) stemming from weaker US$ vs. RM (-9% yoy); and 2) lower EBIT from the NFO division (-19% yoy) due to weaker average sales/draw (-9% yoy due to common draw days for special draws this year) and poorer luck factor (1QFY10 prize payout: 61.6%). As for the RTO segment, operating losses were roughly stable yoy at RM16.8m (4QFY10 operating loss: RM19m).

? Declares interim gross DPS of 20 sen. Tanjong pleasantly surprised us with a first interim gross DPS of 20 sen, as compared to our expectations and 1QFY10 gross DPS of 17.5 sen. Tanjong does not have a specific dividend payout policy, although guidance is that full-year dividends should not be lower than the previous year. Hence, while we believe Tanjong is likely to keep its future quarterly interim gross DPS at 20 sen, the final DPS is a wildcard at this juncture and thus, we are keeping our full-year gross DPS projection of RM1.02 unchanged for now (FY10: RM1/share).

? Outlook. A power plant is scheduled for major overhaul in 2HFY11 and a total of RM50m has been budgeted for this. Further out, the next leg of growth for the power division would depend on adding new power assets. Tanjong targets to double its generating capacity to 8,000MW over the next five years through a combination of greenfield developments and M&A activities. As for the gaming division, the group is actively engaging with the turf clubs, Malaysian Totalisator Board and Ministry of Finance to resolve the operating losses posted by the RTO division (FY10: RM65.8m).

? Risks. 1) Stronger RM/US$ would impact overseas power profits; 2) Higher-than-expected NFO prize payout; 3) Sovereign risk of overseas power projects; 4) Change in landscape under the National Energy Plan; and 5) High foreign shareholding (38.8% as at end-May).

? Forecasts. No change to our earnings forecasts.

? Investment case. Our SOP-derived fair value of RM19.20 and Market Perform call are unchanged.

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