Lukewarm reception to Ekovest’s latest highway win

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This article first appeared in The Edge Malaysia Weekly, on January 25 - 31, 2016.

EKOVEST Bhd has secured the concession for the third phase of the Duta-Ulu Kelang Expressway (DUKE Phase 3), but judging by the performance of its shares, investors are still cautious about the upside potential of the 35km highway, which is slated for completion in 2020.

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Since the announcement of the RM3.738 billion project — now renamed Setiawangsa-Pantai Expressway (SPE) — Ekovest’s share price has fallen nearly 15% from a high of RM1.30. The stock closed at RM1.11 last Thursday. Interestingly, investors seemed to be more bullish about the prospects of Ekovest’s potential involvement in the Bandar Malaysia project. The SPE will be fully integrated into Bandar Malaysia.

On Dec 31 last year, Ekovest chairman and 32.38% shareholder Tan Sri Lim Kang Hoo, through his 60%-controlled Iskandar Waterfront Holdings Sdn Bhd (IWH), undertook a 60:40 joint venture with China Railway Engineering Corp (M) Sdn Bhd to acquire a 60% stake in Bandar Malaysia from 1Malaysia Development Bhd.

Following the announcement, Ekovest’s share price rose 21.5% to a high of RM1.30.

Nonetheless, managing director Datuk Lim Keng Cheng downplays Ekovest’s involvement in Bandar Malaysia during the interview with The Edge. He points out that even before the tender for Bandar Malaysia opened, Ekovest had been in talks with Bandar Malaysia Sdn Bhd as well as Kuala Lumpur City Hall to integrate the highway with the public transport facilities planned for Bandar Malaysia — the second mass rapid transit line and the high-speed rail.

“IWH and Ekovest are totally separate companies, even though there are common shareholders. Both companies will still have to abide by their respective corporate governance rules. Even if there are construction jobs in Bandar Malaysia, we (Ekovest) will still have to bid for them,” says Keng Cheng, who is Kang Hoo’s nephew.

That said, it remains to be seen if Ekovest will undertake the development of the parking facilities that are supposed to be integrated with the highway — a concept that the group is undertaking wherever the highway intersects a public transport line.

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“This is called the ICM, or intercept, collect and move, concept. We want to integrate the highway with park-and-ride facilities so that people can drive from the highway into car parks and hop onto trains or MRT,” explains Keng Cheng.

The car parks alone will not be viable, but coupled with a commercial component, Ekovest hopes to make the ICM facilities economically feasible.

“It will reduce traffic volumes for us, but it is the way to make the highway sustainable and better for the environment,” says Keng Cheng, who believes that highways should complement public transport.

That said, when completed, the SPE is expected to cater for 130,000 trips daily after one year of operation. For comparison, the DUKE (Phase 1), which has been operating since 2009, averages 132,335 trips daily currently.

“DUKE 3 (SPE) has a better catchment area than the DUKE (Phase 1). It is the missing link in KL’s highway network, completing the intermediate ring road. People won’t have to rely on the Middle Ring Road any more,” says Keng Cheng.

The second phase of DUKE, which is scheduled to be completed by year end, is expected to average 80,000 trips a day after its first year of operation, says Keng Cheng.

As for the toll rates for the SPE, Keng Cheng is unable to share more details since it is the government’s prerogative to announce the rates. Nevertheless, he points out that the conditions of highway concessions have become much stricter.

“Firstly, there is the excess revenue clause. If we hit a certain amount, the government will take a cut ... not from the profit, but from the revenue. On top of that, we still have to bear the costs,” says Keng Cheng.

“Secondly, there is the exit clause. If we achieve our IRR (internal rate of return) for the project early, then the concession will automatically come to an end and the government will take over the highway.”

The SPE concession is for 53½ years.

“Compared with DUKE Phase 1, the IRR has been reduced by about three percentage points. Today, it is only in the single digits. On top of that, we have to achieve very stringent KPIs (key performance indicators), for instance, for highway maintenance. If we fail to meet any of the KPIs, we will be penalised with a fine,” says Keng Cheng.

He says the company will not be undertaking a cash call from shareholders to finance the SPE. “For the foreseeable future, based on what we have in the pipeline, we won’t need to raise funds from the shareholders. Once these projects begin, we can get bridge financing. If anything, we can consider spinning off the mature highway assets under the business trust model.”

A business trust spin-off will allow the group to unlock the cash flow trapped in the highways, but there is nothing to announce on that front for now, he adds.

Note that the group booked a revenue of RM134.18 million in the first quarter ended Sept 30, 2015, and an operating profit of RM28.33 million. However, interest expense was RM24.35 million, pulling its net profit down to only RM3 million. As a result, the group is currently trading at almost 50 times earnings.

The SPE will no doubt help keep the group’s construction arm busy over the next four years at a time when the government is applying the brakes on spending. Excluding the SPE, Ekovest had an order book of RM1.89 billion as at December 2015. Of this sum, an estimated RM806.9 million is for internal works — the construction of the group’s property development, EkoCheras.

The group is planning to launch its EkoTitiwangsa project, which has a gross development value (GDV) of RM610 million, this year. The development is part of the KL River City master plan and will be integrated with DUKE Phase 2.

Despite the slowdown in the property market, Ekovest is set to go ahead with its planned launches — with an estimated GDV of RM3.5 billion — over the next 10 years.

“Property is about holding power. Those who have the most holding power will make the most money in this game. This year will be a cooling period, which will determine who the real property players are,” says Keng Cheng.