Investors cool over Tanjong project


  • Business
  • Thursday, 17 Jul 2003

BY KATHY FONG

FOR Europeans yearning for a holiday in a tropical paradise without having to travel too far away from home, a resort island right in the heart of Germany, complete with a rainforest, beaches, water parks and a tropical flowers world, could well prove an irresistible draw. 

That's what gaming operator Tanjong plc, which is behind the project, is betting on.  

But investors as well as analysts who keep track of the counter are not overly warm to the idea – at least for the moment. 

In their view, the contribution from the proposed venture to Tanjong's bottomline is likely to be rather minimal compared with its current earnings. 

Analysts expect the edutainment and leisure-based business to contribute only RM25mil or RM30mil to Tanjong's net profit in FY06. Hence, its earnings per share would increase by only 5% or 6% based on the management's projection of 2.5 million to 3 million visitors to the resort annually.  

The details of the investment plan have not prompted strong buying of Tanjong shares. 

Indeed, the stock fell 60 sen to RM9.60 the day after Tanjong announced the venture, although it has since then managed to recover all its losses mainly due to the prevailing bullish market sentiment. The counter reached a high of RM10.60 on Monday and closed at RM10.40 yesterday. 

Going by the absence of heavy selling of its shares and the steady share price, it appears that the investing public is now more comfortable with Tanjong's venture in Brand, about 60km south of Berlin, Germany. 

Now that more details have been disclosed and the numbers digested, analysts concur that the venture could turn out to be a major income source for Tanjong in the long term.  

It might also become an impetus for future earnings growth for the group if the idea was well accepted by the Germans and was to be replicated in other parts of the world, they said. 

The smaller than expected amount that Tanjong will invest in the project has eased initial fears that the project might strain its balance sheet. 

Investors had also been concerned about the distance of the project and the fact that it was in a market with which Tanjong was not familiar. 

Last Friday, Tanjong announced that the estimated cost of the project was RM304.5mil (70 million euro), inclusive of acquisition costs, which was very much lower than the RM500mil envisaged by the market.  

Tanjong is teaming up with former Genting Bhd executive director Colin Au to convert a free-standing hangar into an edutainment and leisure-based tourist destination. 

Half of the 70 million euro investment would be shared between Tanjong and Colin Au, and the remaining from German bank borrowings. 

The 50:50 joint venture is formed between the group's wholly-owned subsidiary, Tanjong Entertainment Sdn Bhd (TESB), and Au Leisure Investments Pte Ltd. It would have an initial issued and paid-up share capital of 5 million euros, which would eventually be enlarged to 30 million euros. 

The management told analysts last week that the project site would be promoted as an educational, exotic and relaxing experience. And there will be monthly country exhibits and themes to attract repeat visits. 

The potential visitors will be the local population of about 18 million within two hours' drive radius.  

Based on management estimates, the resort will have a capacity for 5 million visitors a year. It is confident that the exotic tropical island could attract as many as 3 million visitors a year given the success of the Eden Project – an educational attraction in Cornwall, Britain – which had 1.9 million visitors last year. 

According to Tanjong's management, the project will break even with about 1.5 million visitors annually. The low operating cost, mainly fixed costs, gives the project a low break even level. And this is what analysts like about the investment. 

They said given the low fixed costs, the resort would be highly profitable as the number of visitors grew. 

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