Thursday, November 10, 2016

Ekovest: What is IRR 10%

In the deal that EPF has signed with Ekovest, as mentioned, there is 1 most important clause - which is the guarantee of 10% IRR by Ekovest to EPF over the period of 5 + 2 years.

What is this IRR for those non-financial people. Basically, what EPF and Ekovest have agreed is a valuation of RM2.825 billion on the DUKE Expressway (DUKE 1 & 2). That valuation has a condition i.e. it must provide a IRR of at least 10% to EPF - a good deal to EPF as it gets guaranteed 10%.

What both parties do is that they most probably use a Discounted cashflow (DCF) method and work backwards whether the revenue, cashflow and profits achieve the intended minimum 10%.

As mentioned, there is a target to get into an exercise be it IPO or trade sale etc for the asset. If Ekovest does not achieve that, it will have to payback to EPF at a certain guaranteed arrangement.

Based on the below table, this is the assumed valuation of the highway in the event there is no dividend paid. It will on compounded basis grow 10% every year. I have provided a row on what would the value be for EPF and Ekovest as well since it still owns 60% of the highway.

Please click to enlarge
As an example, by 2020 the value of the highway if it achieves the 10% IRR to Ekovest would be RM2.481 billion. (This is the reason why I am so positive on Ekovest as this is one of its few assets)

In the event, it does not achieve the intended 10% IRR, it would be however detrimental to Ekovest - which is also why in several news report they have mentioned of their intention to quickly do an IPO probably by 2018.

I however do not think it is that bad as I trust the management to have that confidence that it will achieve 10%. In fact, if I read between the lines, EPF sees it will achieve more than 10%.

By the way, as I know despite I write so much I have not put in my money under this particular personal fund for Ekovest, I have decided to do what is obvious by buying 5000 units of Ekovest-WB (this is how confident I am) as it still has about 2.5 years to go before expiry. I took the opportunity of yesterday's slump to do that.

Purchase of Ekovest-WB at RM1.30
The purchase is partly helped by my sale of Insas-PA as I think the remaining more than 5% of return could be better now.


Sale of Insas-PA


13 comments:

Cheng Swee Tan said...

Hi felicity,

Cheng Swee Tan said...

Hi Felicity, thank you for your sharing and insights on Ekovest. Based on IRR 10%, Ekovest will be worth RM3.42B in 2018. Compared with Litrak today has a market cap of RM3.1B.
DUKE 1&2 span over 37.2 km. Litrak's SPRINT span over 26.5km and LDP has a distance of 40km. Both DUKE and Litrak's SPRINT and LDP are in densely bpopulated areas in the Klang valley.

Do you think DUKE will be able to achieve the 10% IRR target and worth RM3.4B by 2018 ? TQ

felicity said...

HI Tan,

The RM3.42B is for entire DUKE, Ekovest's portion is 60% of it. The look of it Ekovest is confident of the value.

cs said...

DUKE should be able to acheive this number moving forward. Pay attention to the property around that area. You can look back into LDP 5-8 years ago. I think Duke is at similiar stage at the moment.

felicity said...

The full DUKE I.e. inclusive of setiawangsa Pantai could be exciting. It passes the heaviest traffic part of the KL city. Concession is 53 years. I really do not know how to evaluate as it comes with higher costs of building. But I am confident.

Zakaria Abd Rahman said...

What about the impact of new MRT and LRT to traffic intensity - or too small impact?

felicity said...

Thanks zakaria, it seems like it has been taken into consideration when a question was asked to the CEO. Anyway good question but I guess when EPF looks at it they could not have missed this right?

Zakaria Abd Rahman said...

:)..I think most oil and gas investors before also 'missed' the consideration of exponential growth of renewable energy and adoption of shale technology by US - they presumed other people had calculated those numbers. Same with infrastructures, it's very dynamic - I guess. This is just macro view.

Zakaria Abd Rahman said...

Btw, EPF requested profit guarantee of 10% IRR (if traffic projection not met) from the subsidiary - that is why they are not investing in the holding listed company. EPF came as a PE investor that could dictate with undisclosed clauses, but we common stockholder couldnt. We cant take EPF valuation as a full benchmark.

felicity said...

Zakaria, I agree that EPF is investing into a subsiidiary and the valuation should not be full. However, if you read the announcement, the biggest point (as I said) is the requirement to list (or any other exercise) on DUKE. This hopefully will allow investors to directly participate into the return for DUKE depending on how they structure the deal.

Zakaria Abd Rahman said...

Felicity, thanks. Frankly I do not have the capacity to project the traffic density in future. But, my perspective on the deal between EPF and Ekovest is more on innovative loan program. Which will amplify the stress of financial position of Ekovest if projection did not matched. If projection met, it would be great.

felicity said...

The way I see it, they will try to get it listed as soon as possible. After the DUKE 2 is open i.e. after 1 year.

cs said...

I think we are all talking about the IRR and DUKE. We need to consider Bandar Malaysia as well for Ekovest valuation.