Thursday, September 29, 2016

A look at Ekovest

A week ago EPF bought a 40% stake into DUKE1 and DUKE2 highway (DUKE Expressway) for a price of RM1.13 billion. That basically value the entire highway at RM2.825 billion (or even more as I have mentioned before, buying a 40% stake is different from buying a 100% stake - one would pay more for a controlling stake). With DUKE Expressway having a long way before the concession is to end i.e. in 2059, this is an eye opener if one is to look at Ekovest for an investment. (Note, I do not think EPF overpaid for the highway as I do not see EPF does bad deals in Private Equity deals like this - through my observation of its deals in PLUS, KFC and several property development projects - in fact, EPF is very good at this kind of deal. Hence, it is not overvaluing DUKE)

There is no doubt that with the award of another even longer highway (29.8 km) i.e. the now called Setiawangsa-Pantai Expressway (SPE), Ekovest will need to make a cash call for its equity portion. It however did not do that, but instead sold a significant chunk of DUKE Expressway to raise that cash. That seems like a good decision, as it will not want to raise further cash anymore while it gets to work on its new major project i.e. the SPE immediately.

Let's look at where the value Ekovest still has:

  • DUKE Expressway where it still owns 60%. That is still valued at RM1.7 billion if we based our valuation on the recent EPF purchase. That by itself is equivalent to Ekovest market capitalisation today. As for its financial performance, already it is profitable since 2014 and we know that traffic is surely to grow. It has its toll revised from RM2 to RM2.50 from late 2015 for normal cars and with that the revenue has improved further. I definitely see much potential in this highway especially when DUKE2 is to be opened in a few months time. Currently, the performance is excluding DUKE2 which is yet to be ready. When DUKE2 is ready, besides having its own toll, it is designed to feed traffic into DUKE1 as well;
  • The construction of SPE which is going to be a major RM3.738 billion project. Assuming that margin is around 8% (based on its past record), it will translate into profit of about RM300 million over the next 3 years towards completion of the project. Besides that, its construction division has other projects, but obviously the elephant in the room is the SPE;
  • The SPE itself which will have a concession of 53.5 years at a total 35 km in length. I am not sure how attractive is this new highway, but it does go through the most busiest of roads. From UTAR in Taman Melati, it passes though the very busy Jalan Jelatik, towards Bandar Malaysia (do not want to discuss about the controversy, but we know that HSR and major development will be there with huge incentives). The road will then lead pass Mid Valley and ends at SPRINT highway. With DUKE Expressway, SPE and SPRINT - together, I will call it MRR 1-1/2 - i.e. in between the old MRR and the very heavy traffic MRR2. RM5 billion seems like a huge amount for a highway, but again it is a long highway (mostly elevated) with a very long concession. SPE feels like DUKE1 and DUKE2 combined and perhaps pass a very much strategic places in KL;
  • It has several property projects namely EkoCheras, EkoTitiwangsa, The River of Life project and another one in Danga Bay. These probably are not so exciting as compared to other developers' but still worth some few hundred million valuation especially when the landbank is situated in strategic locations.
If one is to be afraid of its high debt, it is not much to worry as the bulk of the loan is for DUKE Expressway which is already ring-fenced. Do I make one feel more comfortable, if I were to say EPF is buying into the subsidiary which has the bulk of the debt? Other than that, they are manageable. However, obviously debt will increase further when the SPE project starts.

I do not want to go too much into details, but let's look at valuation - its current market cap is equivalent to the valuation of 60% of DUKE Expressway. SPE seems promising as its length is about the same as DUKE Expressway (i.e. DUKE1 and 2 combined) - it seems to be hence 1.67x of Ekovest ownership of DUKE Expressway. Its construction arm is to make good profits in the next few years due to the secured orderbook. Its properties holdings are in essence decent. 

At its current price of RM1.93, you are basically paying for an equivalent of its 60% ownership in DUKE Expressway. But, in addition there is the SPE, construction and property divisions. How much you would value those?