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This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

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The government’s decision to raise toll rates at major expressways in the Klang Valley this month is seen as good news for locally listed highway operators, amid expectation that the concessionaires will collect more cash for each vehicle that passes through the toll booths. 

However, Datuk Lim Keng Cheng, managing director of Ekovest Bhd, which owns the Duta-Ulu Kelang Expressway (DUKE), says shareholders should not get overly excited because it will have a neutral impact on earnings.

The toll hike, in his view, should not be a re-rating catalyst for the share prices of highway concessionaires.

“Whether the government raises the toll rates or compensate the highway operators, we would still collect our money one way or another,” he tells The Edge.

“The toll hike will only have a muted impact on our financial performance. For us, it’s the same. Before this, RM2 was charged to the users and the government compensated us 50 sen. Now, we charge the users RM2.50,” he explains. The tolls on DUKE were raised from 

Oct 15 at the Ayer Panas, Sentul Pasar and Kampung Batu toll plazas.

Ekovest (fundamental: 1.15; valuation: 1.40) saw its share price soar 6% intraday on Oct 12, following the announcement of the toll increase. Likewise, the share prices of Silk Holdings Bhd and Lingkaran Trans Kota Holdings Bhd (Litrak) rose by 12.5% and 2% respectively.

DUKE is operated by Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd (Kesturi), a wholly-owned subsidiary of Ekovest.

Since DUKE opened in 2009, Kesturi has been recording annual losses (see table). There was no increase in toll rates until this month. As at June 30 this year, the company had incurred cumulative losses of RM195.7 million, with shareholders’ funds in deficit.

It is worth noting that Kesturi recorded a profit of RM128.5 million for its financial year ended June 30, 2015 (FY2015), but this was mainly due to the restructuring of the previously issued redeemable preference shares class B, which have been converted to equity. Without the restructuring exercise, Kesturi would have recorded a loss of RM43 million in FY2015.

Going forward, Kesturi is anticipated to contribute earnings from FY2016 onwards, but Lim stresses that this should not be attributed to the toll hike.

“At the beginning, every highway will be loss-making. It just so happens that we are now reaching the break-even point,” he says, adding that 46% of DUKE is toll free to allow connectivity for the local community.

Lim expects Kesturi to report a minimal net profit of RM30 million in FY2016, on revenue of more than RM100 million. This takes into consideration a decline in traffic volume on DUKE by 5% to 6% following the toll hike.

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Assuming the government had chosen not to raise the toll rates and instead, paid compensation that had been agreed upon to the highway operator, Kesturi could make a higher net profit of RM35 million, he says.

“We would still be happy even without the toll hike, because the government would pay us compensation anyway. We have raised the toll rates because that was what was agreed. But our traffic is expected to decline after the toll hike so, in that sense, it’s actually bad for us,” he argues.

DUKE has seen annual traffic volume grow steadily over the years, from 17.19 million in 2009 to 36.86 million in 2011, and 43.9 million in 2013. Before the toll hike, the average daily traffic on the highway ranged from 132,000 to 135,000 vehicles.

In general, toll concessionaires are allowed to raise toll rates once every five years. Tolls for  DUKE were supposed to be raised for the first time last year, but the government decided against it. As a result, Kesturi was entitled to compensation of RM22 million last year. The government will also compensate Kesturi for the Jan 1 to Oct 14 period of this year.

For FY2014, toll operation was Ekovest’s second largest revenue contributor after the construction segment, which accounts for 60% of the group’s total revenue. As for its property development division, its landbank in northern Kuala Lumpur is expected to have an estimated gross development value of RM3.24 billion over the next 10 years.

Meanwhile, Lim says Ekovest’s plan to monetise its highway concession assets is still intact. It wants to spin off part of DUKE into a business trust in late 2016 or early 2017.

Interestingly, the likelihood of a corporate exercise for Ekovest is high, according to theedgemarkets.com.

Lim says only the completed highways, which have no construction risk, will be injected into the business trust.

For account purposes, Ekovest will probably maintain a 49% stake in the business trust. This would mean that the debts in the business trust would not be consolidated in Ekovest’s books, which will cause the company’s gearing ratio to drop. 

“Don’t get me wrong, we still like the DUKE project, but it’s a long-term investment and the shareholders have to be patient during the gestation period,” Lim says.

Ekovest had in June last year completed a rights issue and used the proceeds to acquire the remaining 30% stake in DUKE from Malaysian Resources Corp Bhd (fundamental: 1.30; valuation: 2).

To recap, DUKE Phase 1 was completed in 2009 for RM909 million, while the RM1.18 billion Phase 2 will be completed and opened by end-2016.

Ekovest is also planning the RM3.57 billion DUKE Phase 3, which is expected to take 3½ years to construct. The 35km highway will cover areas stretching from Universiti Tunku Abdul Rahman, Wangsa Maju and Ampang to the Tun Razak Exchange and Kerinchi.

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