This article first appeared in The Edge Malaysia Weekly on June 24, 2019 - June 30, 2019

PUTRAJAYA is offering to pay the shareholders of Gamuda Bhd and Lingkaran Trans Kota Holdings Bhd (Litrak Holdings) RM6.2 billion to take over four toll highways in the Klang Valley.

After deducting the outstanding debts of the concession holders, Gamuda’s share of anticipated equity value of the concession holders amounts to RM2.36 billion while Litrak Holdings’ share would be RM2.75 billion.

“Accordingly, the purchase consideration for each Expressway Concession Company per the offer letters is effectively the enterprise value less indebtedness of the respective Expressway Concession Company as at completion,” Gamuda announced on Bursa Malaysia last Friday.

The Minister of Finance Inc (MoF Inc) is offering RM1.377 billion less any outstanding indebtedness as at completion date for all the securities in Kesas Sdn Bhd, RM1.984 billion for Sistem Penyuraian Trafik KL Barat Sdn Bhd (SPRINT), RM2.47 billion for Lingkaran Trans Kota Sdn Bhd (Litrak) and RM369 million for Syarikat Mengurus Air Banjir dan Terowong Sdn Bhd (SMART).

Gamuda expects to get RM1.23 billion for its stake in Kesas, RM870 million for SPRINT, RM2.34 billion for Litrak and RM60 million for SMART.  It owns 70% of Kesas Holdings Bhd, the holding company of Kesas, 52% of Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd, the holding company of SPRINT, 44% of Litrak Holdings, the holding company of Litrak, and 50% of Projek SMART Holdings Sdn Bhd, the holding company of SMART.

Based on its effective interest in these toll highways, Gamuda expects its share of anticipated equity value of the concession holders to be RM2.36 billion.

MoF Inc’s offers are valid until July 12.

According to Gamuda, the offers are subject to satisfactory due diligence findings, the approval of the Cabinet, the execution of a definitive agreement in respect of the offers and adherence to the terms.

It also says the offers will be undertaken by a special purpose vehicle that is wholly owned by MoF Inc, which is to be identified later.

Analysts The Edge talked to last Friday say on the surface, the deal seems to be fair. They point out that the offer prices are close to their own valuations of the concession holding companies based on the discounted cash flow (DCF) methodology.

Meanwhile, the combined offer of RM3.2 billion for Litrak Holdings’ stakes in Litrak and SPRINT translates into RM5.20 per share, which was about RM1 more than the trading price of Litrak Holdings of RM4.21 last Friday.

However, Litrak Holdings’ share price plummeted after the 14th general election. Prior to May 8, 2018, the stock had been trading at more than RM5 per share since March 14, 2016.

At the same time, Litrak Holdings is a dividend play. It has been paying dividends of 25 sen per share for a number of years.

“It all depends on what the cost of entry was for a shareholder of Litrak Holdings. If you had bought the shares at more than RM5 apiece, the premium of 20 sen does not amount to much, especially since the company has been consistently paying dividends,” says an analyst who declined to be named.

“You are going to forgo a cash cow, which still has about 10 to 12 years left on the concessions,” says another analyst.

The deal requires the approval of both Gamuda and Litrak Holdings’ shareholders. The Employees Provident Fund has a 12.18% stake in Gamuda while Kumpulan Wang Persaraan (Diperbadankan) (KWAP) holds 6.11%. Amanahraya Trustees Bhd-Amanah Saham Bumiputera holds 5.64%. 

Together, the government-linked investment companies own a collective 23.93% in Gamuda’s issued and paid-up capital.

Meanwhile, Gamuda is the largest shareholder of Litrak with about a 44% stake. The EPF holds 5.52% in Litrak Holdings while Amanahraya Trustees owns 8.53% of the issued and paid-up capital of the holding company.

However, a fund manager tells The Edge that the deal is a good opportunity for Gamuda to exit some of the expressway concessions as not all of them are making money for the group.  “Rather than holding on to a concession that does not make money, you might as well take up the government’s offer and exit now,” he says, likely referring to SMART, which is believed to be loss-making. He also does not agree that Litrak still has 10 to 12 years of concession period left, arguing that it is less than that.

As for Kesas, which has been enjoying high traffic volume over the years, the fund manager says the deal could be better.

Another analyst says Gamuda may return the proceeds as special dividends to shareholders, plough some of it into its Vietnam property ventures and its Gamuda Cove development in Kuala Langat or invest in recurring income projects.

“My opinion is that the offer to Gamuda is probably at the low end of the range of analyst estimates right now. But my real concern is how they are going to reinvest the money.” 

He believes that Gamuda could utilise RM1 billion of the proceeds to fund the Penang Transport Master Plan. Note that Gamuda is also waiting for proceeds from the government from the disposal of its water concessions.

A RM1 billion dividend payout on RM9.5 billion of market capitalisation would translate into a dividend yield of close to 10%, which would make its shareholders happy, he says. If the deal goes through, Gamuda would have sold its entire concession businesses.  “Gamuda would have to find a business that would be able to provide it with stable recurring income to replace the loss of income from the disposal of its concession businesses so fast.

“This is because with MRT2’s civil works nearing completion, its chunky income from the construction business will deplete fast within the next two years,” says another analyst.
 

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