Sunday, September 2, 2018

How should we see Ekovest?

The change in government is going to see changes in Ekovest from a company perspective which is from largely construction based (from government related contracts) to more of its dependence on its long term assets - toll and land. I know many would be concerned on the toll assets as the new government is looking at ways to eliminate toll but lets face it, this is going to be difficult as the country juggles with our finances and continuous development. Toll over the period like it or not it is still an asset which is generating very good cashflow.

For the next 3 years the consistent revenue that is to be generated is going to come are mainly from construction (SPE highway) and toll (DUKE 1 and 2).

Property business as one know is going to be sporadic until it manages to obtain consistent revenue from its property investment - which potentially will come from EkoCheras mall.

The below is a pick from its latest 4Q18 quarter results, and as we see there is new revenue from DUKE 2 (which increases the contribution from toll) since December 2017. However, in accounting for concession assets, this is also the start where it is starting to recognise the interest expense from the toll assets (see Figure 2).
Figure 1
Hence, profitability from toll concession will not be good, but that is a different story when concerning cashflow. Its cashflow will be good and when the third highway is completed - i.e. the SPE it is all full throttle for the company. Again, I am not worried when it comes to abolition of tolls, it is very hard for the government to do that. Otherwise, they would have contacted the concessionaires and discuss. So far, the only concession that they have contacted is their own - PLUS which is owned Khazanah and EPF. The way I see it is that the current government is trying to avoid the topic until when they are ready to discuss about this.

Figure 2
The concern over the losses for 4Q18. As mentioned in Figure 3 below, part of the losses is due to costs of the failed acquisition of IWCITY - turns out to be a blessing in disguise and its provisioning for LAD - Ekocheras and highwe interest expense as mentioned earlier.
Figure 3

How I see Ekovest

As in many of my investments, I see Ekovest as a good long term investment with solid assets. It is moving into a territory where it will be less dependent on new projects while focusing on what they have built in the last one decade.

Seems to me, after this few years, it hopefully can become a good dividend stock if the controlling shareholder is fair.

11 comments:

Anonymous said...

Dear Felicity

can i know how you see that the higher interest expense are come from duke 2?

"However, in accounting for concession assets, this is also the start where it is starting to recognise the interest expense from the toll assets"

as above, the higher interest expense on last quarter also due to start of duke 2?

thank you for your clarification

felicity said...

DUKE 1, 2 and SPE are concessions. They are following accounting standards for concession assets.

Once the highway starts tolling, they will need to account for interests. Prior to the completion, the interest will accumulate into the total project costs.

Hence, interest expense is higher for 2018.

felicity said...

To add to the above, sometimes accounting is not met with reality.

In projects, the concessionaire will want to complete the project as fast as possible, so that they get the cashflow. However, that's where the interest expense kicks in. As long as the projects cashflow is substantially higher than the interest payment, it most often the case would be fine.

This is a usual scenario of concession business. In early days, they may face losses due to the higher interest expense but with typical growth, there will be a breakeven timeframe and that's where the profit kicks in.

One will see the similar trend in WCE, Airport and all other concession business. This is also why DUKE 1 and 2 was valued at RM2.825 billion 2 years ago. Now, by right it should be worth even more albeit the 60% shareholding.

Anonymous said...

thank you so much Felicity.

keep up the good job!

Tabula Rasa said...

Hi Felicity,

If I read the numbers correctly, toll revenue has to pretty much double to RM81 mil before the gross profit from the toll revenue (assuming a 75% GP margin) can cover the interest rate.

How long would this normally take? Don't forget, I do not think that most of Ekovest's borrowings are fixed so they may incur higher interest expenses if BNM raises our reference rate.

felicity said...

These kind of assets mostly are fixed income securities. the bond community likes these kind of assets until after GE14. Well they will get used to it

felicity said...

https://www.marc.com.my/index.php/marc-rating-announcements/843-marc-affirms-its-aa-is-and-a-ratings-on-kesturi-s-rm2-3-billion-senior-sukuk-and-rm180-million-junior-bonds-respectively-20180104

The above is the bond issue for both DUKE 1 and 2. This is what I meant by it is difficult to eliminate tolls. There are bonds everywhere.

felicity said...

Don't think it takes RM81 million. More like RM50 million. gross margin is probably more than 75%, also usually April to June month is bad quarter due to Hari Raya and puasa month. Traditionally not good period for DUKE1

felicity said...

Mm oreover this quarter, extra 2 additional day holidays and voting day given

Tabula Rasa said...

Thanks for the response, Felicity.

What about the planned IPO for Duke 2 to realise the promised 10% IRR to EFP...with all the talk about abolishing tolls, I would be surprised if IPO is still on the table.

Seems like the only way Ekovest can ensure the 10% IRR is via actual toll collection. Or can Ekovest cite 'force majeure' due change in govn policy? he he

felicity said...

I do not know