Monday, November 7, 2016

What needs to be done by Ekovest

There is no doubt that Ekovest has still a lot of value although to many people the stock has climbed from around RM1.00 to now RM2.25 within less than a year. As much as one can get excited, I should also be afraid that despite good value, stocks can still go back to hibernation and that was what Ekovest was for many many years - since 2000, as I was doing some tracking back on the progress of the company during the weekend.

(Note that I prefer to look at Ekovest as valued at RM1.925 billion at price of RM2.25 rather than just the stock price itself)

For many years, the company has had many construction projects and the company's performance has been fairly volatile as I had mentioned in most construction companies. Its performance has been dependent on projects it has managed to secure as well as signed-off to register the revenue as well as profits, if any. Ekovest had one good break way back in 2004/05 where it secured the DUKE 1 project, however at that time it did not own the concession. The bigger break was back in 2012/13 when Ekovest through issuance of new shares has managed to secure 70% of the concession rights for DUKE 1. Following on, DUKE 2 and later DUKE 3 (now renamed as SPE) have been secured. As mentioned in my article earlier, these are very valuable assets which are able to provide good cashflow over the next 40+ (DUKE1 & 2) - 50+ years (SPE).

There is no other better ways to value these kind of assets besides using DCF and it seems there is already a certain growth trajectory for both parties i.e. EPF and Ekovest to agree on, hence I am quite confident of DUKE 1 & 2 (DUKE Expressway) value as given, or at least close.

Note that in the valuation of DUKE Expressway, a binding agreement was signed with a valuation of RM2.825 billion provided although subject to due diligence by EPF. Ekovest's stock is hence suspended for 2 days to allow finalisation of the contract between EPF and Ekovest although some variation to the earlier agreement may happen after EPF's final due diligence. I would think, for EPF to be committed at a certain valuation before the due diligence, the value of DUKE Expressway is already very close to the valuation of RM2.825 billion. Even if the negotiation is to fail, there are other ways for Ekovest to surface its assets.

I have read of the management of Ekovest intention to list the highways as REITS. That is a possibly good method as it allows direct participation from investors into a certain asset class. If one is to read how EPF's involvement into private equity deals, it has many times put money into a certain cash generating assets and subsequently either allow them time to be have a better and more certain growth path - then monetise them further. That has happened to PLUS and it seems KFC is going through the same path. It is not certain whether EPF may be interested to do the same with DUKE Expressway but that can always happen, and to me is the way to go to provide better returns for its depositors. There are many ways to structure the REITS IPO (if any). It could have directly submit for DUKE Expressway first, then only SPE or could have done for all the 3 highways in one listing. 

With the separate listing of the highway assets, I could safely value the DUKE Expressway and SPE to be not less than RM3.5 billion, even taking out the EPF's 40% portion. One should not forget that by 2018, SPE has still more than 50 years of concession period counting in the construction period.

Although the timeframe for SPE to be monetised (for me) could be too early if it is to be done by 2018, but I guess if it is done the RM1.13 billion cashflow from the sale of 40% of DUKE Expressway may not be used entirely for the equity portion of SPE. This will provide Ekovest with more cash.

I am thinking if the management of Ekovest wants to make it right and not putting the company's stock into hibernation, surfacing the assets individually especially those with good cashflow is the way to go. Let the investors decide which they want to invest into.

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