Government scrapping of tolls a surprise to analysts
KUALA LUMPUR: The recent announcement by the federal government of its intention of scrapping tolls nationwide comes as a surprise as the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) anticipates that the move would have been deferred until fiscal conditions of the nation permit.
According to a press statement on Feb 23, the federal government has announced that they have begun talks with Gamuda Bhd to negotiate the acquisition of the highway concession of four highways – Damansara Puchong Highway (LDP), SPRINT Highway, KESAS Highway and SMART Tunnel.
Upon successful takeover of the highway concession, the federal government plans to abolish the existing toll mechanism.
The breaking of the news came as a surprise to MIDF Research who noted that while they are initially aware of the possible takeovers, they think that the move had come sonner than expected.
Nevertheless, the research arm guides that they predict that the takeover will be conducted in phases.
“This is in consideration of the cost required, coupled with the government’s priority to rein in its finances. On the same token, we understand that the government intends to compensate concessionaires based on the rate stated in the contract that is the construction cost, exclusive of future profit.”
For Lingkaran Trans Kota Bhd (Litrak) who owns majority stake in SPRINT and LDP highway at 52 and 44 per cent, MIDF Research reckons that the impact to the group’s earnings will be net negative as the move will result in an earnings vacuum.
“However, we opine that it is too early to ascertain the impact, as we are lacking details. On that account, our forecasts on the group earnings remain unchanged until further development on the acquisitions and its upcoming 3QFY19 results,” it commented.
Additionally, the research arm guides that they believe the news of the potential takeovers will elevate uncertainties on Litrak as they expect the news will put its investors on tenterhooks with an overtone of caution.
All ink, the research arm is maintaining their ‘Buy’ call on the stock with an unchanged target price (TP) of RM4.92 per share.
“Litrak is still a defensive play with decent dividends yield of 7.3 per cent for FY20 while trading at a steep discount with a price earnings ratio (POER) of 10.6-fold, which is below its 5-year historical PER of 14.2-fold.
“This translates to an earnings yield of 9.4 per cent, implying an attractive spread of 6.7 per cent against the latest 5year Malaysian Government Securities yield of 3.79 per cent.”
“However, we do not discount the possibility of an earnings downgrade as details of the planned acquisition of highway concessions get clearer,” the research arm added.