This article first appeared in The Edge Malaysia Weekly on May 8, 2017 - May 14, 2017

SINCE Ipoh-based public transport service provider Perak Transit Bhd debuted on the ACE Market of Bursa Malaysia at 15 sen apiece last October, its share price has nearly doubled. Year to date, the stock has risen 59% to 25.5 sen, giving the company a market capitalisation of RM291.5 million. A quick check on Bloomberg shows that the stock is trading at a trailing price-earnings ratio (PER) of 10 times and forward PER of 11.6 times.

If the analysts covering the stock are right, Perak Transit has an upside potential of about 18% to 21% based on MIDF Research and Affin Hwang Capital’s sell-side target prices of 30 sen and 31 sen respectively.

“It should not be a problem” to achieve the analysts’ target prices, Perak Transit managing director Datuk Seri Cheong Kong Fitt tells The Edge, because the company’s future growth will be fuelled by the expansion plans it has in place.

“We just went for an IPO last year. Now that we have a listing status, it is easier for us to secure bank loans. Hopefully, we can grow faster by tapping the capital markets,” he says, adding: “Perak Transit is in expansion mode now.”

Apart from bus terminals, Perak Transit also operates public bus services and petrol stations. With a fleet of 171 buses, of which 119 are stage buses and the remaining 52 express buses, the company plies 40 stage bus routes, covering Ipoh and the surrounding areas. Its express bus services connect Ipoh to Cameron Highlands, Taiping, Teluk Intan and Lumut.

Its four petrol stations are all located in the state, namely Shell in Lahat and Tanjung Rambutan, BHP at Terminal AmanJaya and Petron at Lubok Merbau, Kuala Kangsar.

After founding Perak Transit in 2008, Cheong, 57, successfully built its first terminal, Terminal AmanJaya, which is the only gazetted express bus terminal in Ipoh. He is also a major shareholder of the company with 38.76% equity interest.

With the experience and expertise gained from operating Terminal AmanJaya, Perak Transit now aims to replicate its success in three other prime locations — Kampar, Tronoh and Bidor.

Outside Perak, the group is exploring opportunities to construct, manage and operate integrated public transport terminals in Temerloh, Pahang, and Kemaman, Terengganu.

According to Cheong’s younger brother and executive director Datuk Cheong Peak Sooi, the locations of Perak Transit’s upcoming terminals will be “quite similar” to that of Terminal AmanJaya. Hence, it should not be too difficult for the company to bring the same model to these under-served areas in Perak.

“Of course, we cannot build new terminals based solely on our existing concept but we can learn from it and we can improvise,” says the 50-year-old.

Work on Terminal AmanJaya, which was built at a total cost of RM160 million, commenced in 2010 and was completed in 2012. The three-storey building complex has bus platforms, bus holding bays, ticketing counters, retail and office space, advertising and promotion (A&P) space and a budget hotel.

Moving forward, Peak Sooi says Perak Transit plans to develop Terminal AmanJaya into a commercial and lifestyle hub. The expanded terminal, which will see an increase in gross building area to 375,245 sq ft, will allow the group to realise additional rental revenue from retail tenants and A&P space.

“To attract more passengers, we will bring new elements to Terminal AmanJaya, such as a cinema, food court, supermarket and bowling alley. We want to create a retail and entertainment centre for the people, so it will only get better,” says Peak Sooi.

Currently, Perak Transit is building its second terminal in Kampar, which also consists of a hotel, retail shops, cineplexes, cafés and various facilities such as badminton courts, a gym, library and banquet hall.

To recap, in January last year, Perak Transit signed a conditional sale and purchase agreement with Scanwolf Corp Bhd to buy from the latter two parcels of vacant commercial land measuring about 3.72 acres in Kampar for RM1.62 million.

Scanwolf is a Tronoh-based home and kitchen fittings manufacturer that ventured into property development in 2011.

Subsequently, in October last year, Perak Transit raised RM36.75 million through its IPO, of which RM20 million was earmarked to partly finance the construction of Terminal Kampar, which is expected to cost more than RM128 million. The balance will be financed by internally generated funds.

Cheong acknowledges that Perak Transit’s growth prospects for this year and 2018 are not very exciting because Terminal Kampar is slated for completion only in the third quarter of next year.

“We might still be able to achieve 20% to 25% profit growth [in 2017 and 2018] but we will probably see stronger growth in 2019. Once Terminal Kampar is completed, we will see significant profit contribution from there,” he says.

In its financial year ended Dec 31, 2016 (FY2016), Perak Transit saw its net profit grow 13.2% year on year to RM21.6 million. Revenue, too, rose, by 21.6% to RM90.2 million.

Next, says Peak Sooi, Perak Transit intends to expand its territory to Tronoh and Bidor but unlike Terminal Kampar, there is no concrete plan yet. “Our strategy has always been ‘to buy when the land is cheap’. We want to go in at a lower cost and spend prudently.”

On average, he says, each new terminal project takes about two years to complete. “These are long-term projects. It is possible but not likely that we will build a new terminal every year because our gearing will become too high. We have to plan properly and slowly, one after another.”

As at Dec 31, 2016, Perak Transit was in a net debt position of RM87.1 million. It saw its gearing ratio decrease from 0.95 times in 2015 to 0.6 times last year.

Cheong says the construction cost of Terminal Tronoh and Terminal Bidor will be comparable to that of Terminal AmanJaya and Terminal Kampar. “We have yet to decide how to finance the construction of [Terminal] Tronoh and [Terminal] Bidor, but we might consider [the issuance] of irredeemable convertible unsecured loan stocks or redeemable convertible preference shares or even equity shares.”

However, there is no plan at the moment for the company to undertake a share placement, be it private or special, to raise fresh capital.

Cheong opines that the capital expenditure for the upcoming terminal projects is unlikely to affect Perak Transit’s dividend payments in the coming years. “We have a dividend policy [to distribute up to 25% of net profit in FY2016 and FY2017] and we want to honour that.”

Perak Transit paid an interim dividend of 0.15 sen per share on Jan 24 and will pay another interim dividend of 0.2 sen per share on May 19.

Despite being an ACE Market company, Perak Transit has attracted a number of institutional investors, including JP Morgan Malaysia Fund, Philip Capital Management Sdn Bhd, TA Investment Management Bhd and some funds under RHB Bank Bhd.

The company is reported to have said it aims to migrate to the Main Market as early as next year in a move to enhance its visibility and gain wider investor recognition.

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