A fresh offer for PLUS
Main shareholders indicate they are unlikely to sell stakes
THAT the shareholders of highway operator PLUS Malaysia Bhd, namely Khazanah Nasional Bhd’s UEM Group Bhd and the Employees Provident Fund (EPF) received a takeover offer this week for their stakes in PLUS, is not entirely surprising or new.
The RM36bil offer came from Maju Holdings Sdn Bhd, a diversified company which, among others, owns a key highway concession. Maju is the vehicle of tycoon Tan Sri Abu Sahid Mohamed whose foray into the corporate world dates back almost two decades when he laid out a plan to rescue the ailing Perwaja Steel Sdn Bhd.
Notably, the offer by Maju is the second private sector offer in recent years after ex-Renong Bhd chief Tan Sri Halim Saad’s offer three years ago.
Observers reckon there may be more suitors to come as PLUS owns the most lucrative highways in the country.
Abu Sahid, who recently indicated interest for PLUS, has claimed that should the deal go through, toll rates for PLUS highways will not be increased for the next 20 years, which is when the existing concessionaire agreements end.
PLUS is the largest highway concessionaire in the country, operating eight expressways under five concessions.
Its highways are the 772-km North South Expressway (NSE) which runs from Bukit Kayu Hitam in Kedah near the Malaysia-Thai border to Johor Baru, the New Klang Valley Expressway (NKVE), Federal Highway Route 2, the Seremban-Port Dickson Highway, the North-South Expressway Central Link (NSCEL), the Malaysia Singapore Second Link (MSSL), Lebuhraya Butterworth-Kulim (BKE) and Penang Bridge.
Maju, meanwhile, states that it has a total asset value of RM6.3bil, of which RM3bil is the current value of its Maju Expressway (MEX), which links Putrajaya, Cyberjaya, KLIA and LCCT with Kuala Lumpur.
In response to the proposed offer, both UEM and EPF have said that they are in the midst of reviewing the letter of intent in relation to the proposed offer, and “until we conclude the review process, our current stand remains that we have no intention of selling our respective stakes”.
Industry observers are divided on the outcome of the proposed deal.
Lower margins
One observer familiar with PLUS points out that prior to PLUS being taken over by the EPF and UEM Group back in 2011, PLUS had delivered a five-year average EBITDA margin of 77.4%.
After five full years of operations as a private company, its EBIDTA margin now stands at about 67.8% , suggesting that operating and maintenance costs could be contributing to the decline in the margins.
To be sure, under its current concession agreements, PLUS was supposed to be accorded an increase of 5% in its toll rates last year.
However, this did not materialise. According to documents obtained from the Companies Commission of Malaysia, for the financial year ended Dec 31, 2016, PLUS’ profit after tax increased to RM308.99mil from RM23.12mil a year earlier. The jump was mainly due to a recognition of a compensation to PLUS in the absence of the scheduled toll rate hikes.
Interestingly, PLUS said it paid a total of RM720mil and RM815mil in net dividends to its shareholders in 2016 and 2015, respectively.
An executive familiar with the workings of Maju points out that based on back of the envelope assumptions, the FY15 RM815mil dividend payout to EPF and UEM which translates to about RM400mil each, would have yielded EPF contributors some RM28 per contributor (RM400mil/14 million EPF contributors).
“If EPF and UEM were to take up Maju’s RM36bil offer, of which RM4bil is a cash portion, they would get RM2bil each, which translates to RM142 per EPF contributor (RM2bil / 14 million contributors),” says the executive.
“Hence, the notion of PLUS being a significant cash cow and dividend contributor to EPF contributors is not accurate.”
He also claims that PLUS’ operations and maintenance costs per km are 50.9% higher than MEX’s as at last year.
Maju is believed to be looking at a direct cost reduction of up to 27% and heavy repair cost reduction of up to 41%, if it takes over.
With the proposed acquisition which will include the assumption of PLUS’ debts, the executive says Maju intends to reduce the Government’s contingent liabilities by RM30bil and forfeit government toll compensation of up to RM900mil.
Remote chance
Meanwhile, at least one rating agency thinks that the likelihood of the government ceasing to hold a stake in PLUS is remote.
In its latest comprehensive report, notably published before Maju’s proposed offer, Malaysian Rating Corp Bhd (MARC) says “considerable comfort” is derived from the implied commitment of the federal government to remain as PLUS’ single largest shareholder.
MARC has affirmed its AAAIS rating – which incorporates a two-notch rating uplift
Malaysian Rating Corp Bhd
– on PLUS’ RM23.35bil sukuk musharakah programme with a stable outlook.
“Under the terms of the sukuk programme, the cessation of the government to be the single largest shareholder of PLUS, either directly or indirectly via the Ministry of Finance Inc, EPF and/or Khazanah collectively would constitute an event of default,” it says.
MARC says it considers the government’s golden share and indirect major shareholding in PLUS as well as the critical role of the NSE in the country’s transportation system as factors underpinning the rating uplift.
PLUS is 51%-owned by UEM, a wholly-owned unit of national sovereign fund Khazanah while EPF owns the remaining 49% of the company.
MARC, in its report, says PLUS’ standalone rating is premised on its satisfactory cash flow coverages on the back of stable traffic performance of its portfolio of matured highways .
“Moderating the rating is PLUS’ high gear- ing level and the potential impact on traffic volume from new highways and alternative transportation modes.”
According to information published in the report, for the first nine months of 2016, the NSE registered a moderate 4.4% growth in traffic volume to 13.4 billion passenger car unit-km (PCU-km) while the NKVE recorded a strong growth of 8.1% to 2.3 billion PCUkm, mainly supported by growing number of commuters in north-west Klang Valley.
The MSSL also showed a marked improvement of 8.5% growth during the period, attributable to the new developments surrounding Nusajaya and improved connectivity to west Johor Bahru via Gelang Patah, MARC notes.
Meanwhile, the NSECL grew 8.6% in traffic volume in the first nine months of last year despite the competition from the new Light Rail Transit (LRT) extension to Putra Heights, the rating agency points out.
Both Penang Bridge and BKE however registered minimal traffic growth as the highways are already mature.
MARC says PLUS’ net operating cash flow of RM1.99bil as at the first nine months of last year, (9M2015: RM1.95bil) is sufficient to cover its debt service obligations of RM1.54bil.
“PLUS’ finance service coverage ratio post-coupon payment on its redeemable convertible unsecured loan stock (RCULS) of RM720mil remained adequate with estimated ending cash balance of RM2.3bil at end2016.
“However, the company’s gearing level further deteriorated on the back of high accumulated losses due to higher amortisation charges on concession assets and substantial financing costs and coupon payments on the RCULS.”
The key questions remain.
At this juncture, can PLUS be better managed by another party?
And can it do without a toll rate hike? For now, PLUS’ cashflow is more than enough to cover its debts servicing. The shareholders also are getting a return on their investments on the highways.
It is understood that PLUS’ heavy debt repayment will likely only start from year 2020 onwards and will pick up until the end of the concession agreements in 2038.
By then however, there will be an option of re-financing the debts, which may not require any toll rate hike.
The underlying fundamental of any tolled highway is that traffic flow should keep growing and revenue keep increasing.
If costs are kept minimal, the chances of a toll rate hike will diminish.
Moderating the rating is PLUS’ high gearing level and the potential impact on traffic volume from new highways and alternative transportation modes.