Franklin Templeton: Investors to maintain cautious outlook on toll roads

KUALA LUMPUR: Investors will maintain a cautious outlook on the toll road sector, due to a lack of details and uncertainties concerning the takeover plans for Gamuda Bhd and PLUS Malaysia Bhd highways, says Franklin Templeton GSC Asset Management Sdn Bhd.

Chief executive officer and Head of Malaysia fixed income and sukuk, Hanifah Hashim said while the budget touched on funding for the toll road takeover via a government guaranteed bond issuance, there was still insufficient information to properly assess the risks involved.

She also said vital details, including the timeline of the takeover, existing bond redemption values, and explicit details on toll discounts were vague at this juncture.

“Until there is more clarity on the direction of the toll road sector, bond investors will continue to shy away from investing in toll road bonds as proven by the lower, secondary volume traded for PLUS bonds in 2018 compared to 2017,” she said in a statement today.

In the recent 2020 Budget announcement, Finance Minister Lim Guan Eng said the Cabinet had approved his ministry’s proposed acquisition of four Klang Valley highways that would be funded via government-guaranteed borrowings.

He also said the Cabinet would consider all proposals, including from Khazanah Nasional Bhd, to acquire or dispose of all shares of PLUS Malaysia with the end goal of abolishing toll collection gradually.

The four highways are the Shah Alam Expressway (Kesas), Damansara-puchong Expressway (LDP), Sprint Expressway (Sprint) and Smart Tunnel (Smart).

Gamuda is a substantial shareholder in all four highways.

Hanifah said investors were currently pricing in another 25 basis points interest rate cut in November 2019 or the latest by the first quarter 2020, due to the perceived sluggish growth scene arising from external headwinds.

“However, the higher inflation rate target of 2.0 per cent and higher gross domestic product (GDP) growth target of 4.8 per cent, lowered the probability of another rate cut in the short term.

“Notably, Malaysia was ahead of its regional peers in terms of monetary easing. We expect bond yields to trade sideways due to a higher inflation target implying an upward bias in bond yields, though lower gross MGS supply should keep yields supported in 2020,” she added.

As fiscal deficit in 2020 will be compressed by 0.2 per cent to 3.2 per cent from 3.4 per cent, gross Malaysian Government Securities supply should be on a declining trend yearon-year.

“On the other hand, given unpredictable global trade trends, any wildcard may cause an uptick and we expect bond yields to be volatile as a result,” Hanifah said.