This article first appeared in The Edge Financial Daily on June 25, 2019
Lingkaran Trans Kota Holdings Bhd
(June 24, RM4.91)
Upgrade to buy with a higher target price (TP) of RM5.21: Lingkaran Trans Kota Holdings Bhd (Litrak) last Friday received a letter of offer from the Ministry of Finance Incorporated (MOF Inc) with respect to acquiring all securities of Lingkaran Trans Kota Sdn Bhd (which is the concession holder of Lebuhraya Damansara Puchong [LDP]) (Litrak LDP) for an enterprise value (EV) of RM2.47 billion, and its 50% associate, Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd (SPRINT) for an EV of RM1.98 billion.
Litrak anticipates that the equity value for its highway concessions (premised on the aforesaid EV and indebted as at completion combined with normal operating conditions including the receipt of all receivables due under the concession agreements) to be: Litrak LDP at RM2.30 billion and SPRINT at RM450 million, according to Litrak’s share.
The acquisition of the two highways in addition to Kesas and SMART will prevent compensations of more than RM5.30 billion due to the freezing of toll rate hikes. Under the new congestion charge system that was previously announced, commuters using these four highways will save as much as RM180 million per annum.
From a shareholder’s perspective, we believe that the offer is appealing. The combined price tag of RM2.75 billion for both highway concessions translates into an effective offer price of RM5.21 per share with a price-to-book value (PBV) of 2.96 times, a 24% premium to the 12-month trailing PBV of 2.39 times. Moreover, the anticipated offer price of RM5.21 per share constitutes a 28% premium to our TP of RM4.08 per share derived from discounted cash flow valuation.
The average weekday tollable traffic volume through LDP and SPRINT has been on the downtrend since financial year 2015 following the toll hike in October 2015. We expect growth in traffic volume to remain muted as the ridership of public transportation especially LRT (Star and Putra), KTM Commuters and KVMRT Line 1 has been on an upward trajectory.
Moreover, the introduction of the unlimited monthly pass of My100 and My50 will further encourage the use of public transportation in the near term. On a longer term, the completion of KVMRT Line 2 in 2022 which connects Sungai Buloh, Serdang and Putrajaya combined with the possibility of KVMRT Line 3 to be reinstated will exacerbate the downside risk on tollable traffic volume.
Specifically for SPRINT, the Damansara Link runs parallel to the stretch of KVMRT Line 1 from Semantan station to Taman Tun Dr Ismail station and we opine that the impact towards traffic volume will be more pronounced with the continuous improvement in public amenities and connectivity. Of the four stations competing directly with Damansara Link, the Phileo Damansara and Pusat Damansara stations are equipped with park and ride facilities with over 500 car parking bays.
Due to the attractive upside from the current price and our valuation, we advise investors to accept the offer as an exit strategy amid the lack of catalyst for LDP and SPRINT. As such, we upgrade our call on Litrak from “neutral” to “buy” with a TP of RM5.21 per share, reflecting the offer price by MoF Inc, on the basis that the deal will go through. — MIDF Research, June 24