PNB buys SILK Highway for RM380m

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This article first appeared in The Edge Financial Daily, on January 19, 2017.


KUALA LUMPUR: SILK Holdings Bhd’s toll concession asset will be sold to Permodalan Nasional Bhd (PNB) for RM380 million in cash, both said in a joint statement yesterday. The sale will see SILK Holdings netting a gain of RM365.32 million.

According to a press release, SILK Holdings has entered into a conditional share purchase agreement with PNB for the disposal of 100% of the issued and paid-up share capital of Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (SILK) for a cash consideration of RM380 million.

This confirmed The Edge Financial Daily’s report that a government-linked fund is involved in preliminary talks with SILK Holdings to buy the asset.

SILK is the concession holder of the 37km Kajang Traffic Dispersal Ring Road (SILK Highway) under the concession agreement executed in October 1997 to finance, design, construct, operate, and maintain the SILK Highway for a total of a 36-year period ending July 31, 2037.

In the press release, it said that SILK Holdings intends to allocate up to RM200 million for future investments including enhancing and strengthening its existing offshore marine support services business and investment in related businesses in the oil and gas segment as well as other viable investment opportunities to be identified, up to RM70 million for distribution to shareholders of SILK Holdings, and RM110 million for general corporate and working capital and others.

It added that the disposal was in line with the group’s strategy to monetise and unlock value of its infrastructure assets to allow SILK Holdings to streamline its operations and use its financial resources to focus on offshore marine support services.

In a filing with Bursa Malaysia, SILK Holdings said the consideration is at a premium of 137.5% to its original cost of investment of RM160 million in SILK and represents an enterprise value/earnings before interest, taxes, depreciation and amortisation multiple of 12.38 times.

“In addition, based on the disposal consideration and SILK’s projected cash flow available for shareholder up to the end of the concession period, the implied discount rate is approximately 12%. This is in line with the cost of equity for comparable highway concession companies in the Asia-Pacific,” it also said.

It added that subject to the completion of the proposed disposal, part of the proceeds will be distributed back to shareholders via a cash dividend of 10 sen per share or an equivalent of RM70.15 million.

The group is expected to net a gain of RM365.32 million on the disposal, and improve its gearing ratio from 91.57% as at end-2015 to 53.29% after the completion of the sale.

The disposal is subject to the approval of sukuk holders and shareholders, among others.

As for PNB, the acquisition is part of its strategy to expand and enhance its existing portfolio of highway infrastructure assets which provide a recurring income stream, in line with its objectives of enhancing long-term sustainable returns to its unitholders. PNB’s existing investment in highway concessions is currently through its wholly-owned subsidiary Project Lintasan Kota Holdings Sdn Bhd, which operates three highways, namely, Ampang-Kuala Lumpur Elevated Highway, Guthrie Corridor Expressway and Lebuhraya Kemuning-Shah Alam.

The proposed disposal is expected to be completed by the first quarter of 2017, subject to all relevant approvals being obtained and the fulfilment of several conditions including the completion of due diligence.

Recall that before PNB, there had been three different parties expressing their interest to buy into SILK Highway since 2014. IJM Corp Bhd proposed to buy SILK for RM398 million in cash back in May 2014, but the deal was mutually called off following the non-fulfilment of certain conditions precedent within the agreed timeline.

The next to express interest was Taliworks Corp Bhd in September 2015, which owns a 55% stake in Cerah Sama Sdn Bhd, the concessionaire for the Cheras-Kajang Highway and New North Klang Straits Bypass Expressway. Last May, Taliworks chief investment officer Kevin Chin Soong Jin said that the company was hoping to close the deal within the next few months, but it eventually decided not to proceed with the acquisitions.

The most recent one before this announcement was WZ Satu Holdings Bhd, which signed a heads of agreement (HoA) in June 2016 for the acquisition of a 100% stake in SILK for RM368 million. WZ Satu also had a change of mind when it terminated the HoA just three months later.

It is understood that the failure in the past three attempts to acquire the SILK Highway was partly due to the terms of the sukuk where the holders enjoyed a higher profit-sharing rate following a lower rate in the initial years to ease SILK’s burden as it was financially stressed in the early years.

While it is too early to tell if the acquisition would proceed smoothly, SILK Holdings, which was suspended from trading yesterday, has seen some momentum and a surge in its share price since the new year, rising 19.1% year to date.

It was last traded at 41 sen, giving it a market capitalisation of RM284.1 million.