Dividend boost for Ekovest on DUKE disposal

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This article first appeared in Corporate, The Edge Malaysia Weekly, on August 29 - September 4, 2016.


EKOVEST Bhd’s shareholders can expect a bumper dividend if the company is able to successfully dispose of its 40% stake in the Duta-Ulu Kelang Expressway (DUKE) to the Employees Provident Fund (EPF).

Recall that Ekovest on Aug 19 announced that it had received an expression of interest from the EPF to acquire the 40% stake in Konsortium Lebuhraya Utara Timur (KL) Sdn Bhd (Kesturi).

“Some of the proceeds will be used to reduce our debts, some will be reinvested. But we will definitely set aside some to pay a special dividend and reward shareholders,” says managing director Datuk Seri Lim Keng Cheng, although he would not disclose a specific quantum.

He could not indicate the disposal price as Ekovest is in confidential discussions with EPF. It is understood that EPF is currently undertaking due diligence on the highway concession, and will meet with Ekovest over the next week or two to cement the deal.

However, Lim had previously told The Edge that Kesturi is estimated to be worth between RM3 billion and RM4 billion on a discounted cash-flow basis. A 40% stake would net Ekovest between RM1.2 billion and RM1.6 billion on that basis.

That works out to RM1.40 to RM1.80 per share. In contrast, Ekovest’s share price closed at RM1.68 last Thursday, up 83.96% year on year. However, EPF should not have much difficulty assessing the fair value of Kesturi since it is familiar with the assets. Recall that EPF-controlled Malaysian Resources Corp Bhd (MRCB) used to hold a 30% stake in Kesturi. It sold the stake to Ekovest in early 2014 for RM228 million cash, giving the latter full control of the concession.

But when MRCB disposed of its stake, Kesturi only held the concession for the 18km-long DUKE. The 16km long DUKE phase 2 had only just been approved, but Kesturi had to complete financial close on the project. Note that DUKE phase 2 costs RM1.18 billion.

Back then, one of the reasons MRCB chose to dispose of the asset was its reluctance to invest further in an asset in which it held a minority stake. The group preferred to lighten its balance sheet and focus its capital elsewhere.

Hence, EPF is acquiring a vastly different asset from the one that MRCB had sold to Ekovest. Not only does DUKE boast mature traffic volumes that are now in line with projections, but it will also come with a 16km-long extension. On top of that, DUKE phase 3 will boost traffic when it is completed in 2020. Lastly, EPF bears no construction and execution risk.

For the financial year ended June 30, 2015, Kesturi booked a profit after tax of RM128.49 million. Note that the profits were boosted by a one-off non-operating income of RM171.8 million in the year resulting from the conversion of high-yield series A redeemable preference shares (along with accrued dividends) into non-interest bearing preference shares amounting to RM360.1 million. Stripping out the one-off gain, Kesturi would have posted a loss of about RM43.3 million.

However, this is still a substantial improvement from the previous year. Kesturi posted a loss after tax of RM137.58 million for the 18 months ended June 30, 2014 (the company changed its financial year end from Dec 31). Note also that depreciation contributed heavily to Kesturi’s losses. The company is Ebitda (earnings before interest, tax, depreciation and amortisation) positive.

DUKE phase 2 is expected to be completed around the time EPF concludes  the acquisition of the 40% stake. The extension will also boost average daily traffic (ADT) numbers for the existing highway above the original projections, something that will be priced into the valuation of EPF’s 40% acquisition.

Keep in mind that Kesturi’s traffic volumes for DUKE phase 1 are currently in line with original projections that do not take into account the second phase.

“For the first eight months of 2015, DUKE’s ADT grew by 6.9% to 133,334 vehicles, largely in line with the projection of 123,566 vehicles,” writes Malaysian Rating Corp Bhd in a report on Kesturi’s RM2.3 billion senior sukuk and junior bonds. The debts have  

AA-IS and A- ratings respectively.

 It is understood that when MRCB disposed of its 30% stake, traffic volumes were still below projections because the highway was not fully mature yet. Today, these projections have since been revised to factor in DUKE phase 2 and phase 3.

Recall that Ekovest earlier this year was finally awarded a 53½-year concession for the 32.1km-long DUKE 3 concession. Note that this extension is not part of Kesturi, so EPF is not paying to build it. Instead, it is held under Lebuhraya Duke Fasa 3 Sdn Bhd, which has already been funded by a RM3.64 billion sukuk wakalah issuance last week.

Looking ahead, it remains to be seen what price EPF and Ekovest will agree upon, and how much of a dividend will be paid.

Even on the more consevative DCF valuation of RM3 billion, the sale would net RM1.40 per share. For perspective, Ekovest’s dividend per share was only two sen last year, giving the stock a yield of 1.2%.