A fresh of­fer for PLUS

Main share­hold­ers in­di­cate they are un­likely to sell stakes

The Star Malaysia - StarBiz - - Companies & Strategies - By YVONNE TAN yvonne@thes­tar.com.my

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.

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