This article first appeared in Corporate, The Edge Malaysia Weekly, on May 16 - 22, 2016.

SLIGHTLY over two years ago, Ekovest Bhd acquired the remaining 30% stake in the Duta-Ulu Kelang Expressway (DUKE) from Malaysian Resources Corp Bhd (MRCB) for RM230 million. Today, the group is seeking to raise over RM1 billion from the disposal of a 30% stake in the now-enlarged highway concession that includes a second phase.

According to sources, Ekovest is in talks with several parties that are valuing the highway concession at between US$750 million and 

US$1 billion, based on discounted cash flow. Hence, a 30% stake in the company would fetch around RM1 billion.

“Of course, we will sell for more than we bought it for. We must create value for the shareholders,” managing director Datuk Seri Lim Keng Cheng tells The Edge.

While unable to comment on the indicative value of the highway assets because the sale process is ongoing, he points out that the highway is substantially different now. 

Since MRCB sold its stake, Ekovest has undertaken the second phase, which is now 80% completed. In addition, DUKE’s traffic volumes have exceeded projections. Prior to MRCB’s disposal, traffic volumes underperformed projections by 1.5% in 2013. And Ekovest has benefited from the hike in toll rates last year.

“Selling a strategic stake in the infrastructure assets will allow us to recapitalise and plough the money back into our construction and property businesses. It is something we have talked about for some time. I can’t make any promises yet, but depending on the price we get, we hope to pay out some dividends to reward the shareholders,” says Lim.

No binding offers have come in yet for the highway, he says, although many local and foreign parties have expressed interest. This includes the Employees Provident Fund (EPF), which has reportedly shown interest in acquiring a stake in the DUKE concession.

Last Tuesday, EPF CEO Datuk Shahril Ridza Ridzuan told the press that the pension fund was looking to invest in infrastructure assets, which could include but would not be limited to DUKE.

It is interesting to note that Shahril used to be a director of Konsortium Lebuhraya Utara-Timur Sdn Bhd, the holding company of the DUKE concession. Shahril was the group managing director of MRCB between 2003 and 2009. He still serves as a non-independent, non-executive director.

Lim stresses that Ekovest is not in a hurry to recapitalise its highway assets. After all, Ekovest has for some years been exploring the option to recapitalise its infrastructure assets via a spin-off under a business trust, similar to a real estate investment trust.

The business trust route is still on the cards, says Lim, but management has opted for an outright sale of a non-controlling stake because it is quicker.

“But don’t get me wrong, we do not need this money desperately. Even without this fundraising, we have enough for DUKE 3, for the RM850 million equity [portion],” says Lim.

DUKE 3 is the informal name for the third phase of the group’s DUKE network, officially known as the Setiawangsa Pantai Expressway. Ekovest earlier this year secured the 53-year concession for 50km long DUKE 3, which has an estimated cost of RM3.7 billion, although the market’s reaction to the news at the time was relatively lacklustre.

Over the past two months, however, Ekovest’s share price has risen by over 52% to close at RM1.62 last Thursday.

Perhaps one reason for the trading interest in Ekovest’s shares could be increased engagement by the company with analysts and fund managers ahead of a RM3.6 billion bond issuance to fund DUKE 3.

Currently, the company isn’t covered by any analysts, but that could change.

One reason the stock is of little interest to analysts is the fact that the shares are tightly held and thinly traded. Previously, Ekovest’s daily trading volume averaged only 165,000. Of late, however, the group’s second largest shareholder, Datuk Haris Onn Hussein, has been actively disposing of his shares.

Between April 18 and May 6, Haris disposed of 49 million Ekovest shares via his 99% controlled vehicle — Kota Jayasama Sdn Bhd. This has reduced his holdings from 18.29% to 14.43%. Interestingly, his shares have been disposed of via a “private arrangement”, according to Bursa Malaysia filings. At press time, no new substantial shareholders had emerged.

Tan Sri Lim Kang Hoo is the largest Ekovest shareholder with a 32.4% stake. Kang Hoo is uncle to Keng Cheng and a major shareholder of Iskandar Waterfont City Bhd, Knusford Bhd and PLS Plantations Bhd.

Market observers speculate that Haris may have sold some shares to fund managers who are interested in taking a position in the company. The filings with Bursa do not show at what price the shares were disposed of, but off-market data indicate that Haris’ latest disposal of four million shares on May 6 was transacted at RM1.55 apiece.

On May 11, another 8.5 million Ekovest shares crossed off market at RM1.57 apiece in direct trades.

With the possibility of analysts initiating coverage on Ekovest, the improved profile of the stock could sustain trading interest. However, it remains to be seen if there will be sufficient liquidity for the stock going forward.

Another near-term catalyst would be the successful recapitalisation of the highway assets and a dividend payment.

In the medium term, Ekovest is also bidding for packages in the second Mass Rapid Transit line, the third Light Rail Transit Line, the Damansara-Shah Alam Highway and the Sungai Besi-Ulu Kelang Elevated Expressway.

The group still has RM5.28 billion in outstanding construction order book, of which 84.7% or RM4.47 billion is external. Note that Duke 3 and the remainder of Duke 2, which have an outstanding RM3.74 billion and RM519 million respectively, are considered external order book since the client is the government of Malaysia.

Looking a little further ahead, Ekovest is looking to secure more highway concessions. According to Lim, the company has already submitted several proposals for additional highways that will be of similar length to Duke 3’s 50km. However, the cost of the proposed highways is expected to be lower because they will have fewer elevated portions, says Lim.

Meanwhile, the group has 39.22 acres of land in Kuala Lumpur, with an estimated gross development value of RM7.78 billion. The group also has 25 acres of land in Danga Bay, Johor Baru and 12 acres in Kuantan, Pahang.

“We are not worried about the downturn in the property cycle because we don’t have to launch right now. I believe in sustainability, which is why there is no charge on our land. We are not a developer that just flips properties. We want to generate recurring income from our properties and will launch when the time is right,” says Lim.

Lim notes that the group’s retail mall in EkoCheras, which is part of a mixed-use development, has already booked in 40% tenancy, although the project is nearly 1.5 years from completion.

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