Monday, February 25, 2019

The idea to buy Gamuda's related toll highways probably is the most rational (among the rest)

Prime Minister's Department made an announcement where it is in negotiation to buy the concession owned by Gamuda, and this is probably the most rational.

Gamuda as mentioned owns 44% of LITRAK which has LDP and SPRINT under that vehicle, 50% of SMART in partnership with MMC, and 70% KESAS in partnership with Selangor State. These highways pass through the most populated areas of Klang Valley, hence by buying them, it probably sends a message that they are doing something to their promises. It would impact the most number of people although we can say that whatever that is forgone towards development in the rural is provided to the urban. The fact of the matter is that, cost of living is most dearly felt in the urban area than the rural.

Most of Gamuda's related highways except for SMART is highly profitable. Most of those tolled highways additionally are left with short tenure, which makes it more reasonable to buyback. Costs to the government will not be as high. LITRAK's highways will end by 2030 while KESAS should have ended by 2024. I believe SPRINT should have ended by 2034 to 2036.

The most significant piece of the proposal is that the government is exploring to impose "congestion charge" pretty much like Singapore's concept - without the smartness yet, as Singapore's concept is charged based on traffic, where it is proposed for the current charges is charged as congestion charge for 6 hours during the peak hours. Between 11pm to 5am, it is proposed for non toll charges while 30% discount will be given for off-peak times.

This concept is a good idea as it probably disperse traffic more evenly, hence basically asking companies and people to relook at the working time. It is current, as most ideas are towards flexi hour working, which to me brings even more productivity than not. A simple fact that can be argued is that with people spending less time on the road as well as better utilisation of mass transportation services, it by itself already causes better management of facilities and time.

Before this, I have always wanted to suggest towards creation of a "transportation fund" as part of the ways to address the promise towards reducing toll highways. It seems that this one is a way to start. The collection from the full fare in peak hours and further 30% discount is a model that can be worked on. To impose congestion charges even on roads that are non-tolled at the moment will not be a popular idea, but that is one which the government must look at holistically, as in the future our KL city will be almost deadlocked, if we do not look at the revise transportation model. As it is MRT3 is being postponed and the current situation will not allow the government to even consider more tolled roads.

The transportation fund that I have thought of can be used to buy up some of the tolled roads as and when they become available for purchase. The government need not buy them off in one go but it can be done in stages. One of the entity that government could work with is Khazanah and I believe Datuk Shahril the current CEO of Khazanah should be experience enough to look at this.

Why Gamuda rather than PLUS for example?

If one looks at the highways that Gamuda has control of, they probably are less affected by gearing. LITRAK's debt for example is about RM1 billion. And if the government is to take over the concession, they can also take up the debt. The PLUS one is much bigger, which I believe the debt through bonds is still around RM30 billion. Moreover, who is to compensate the EPF's contributors whom have funded the purchase of the concessionaire 8 years ago at RM34 billion enterprise value?

The ones owned by Prolintas under PNB are also more challenging as we know PNB is an investment arm for a large part of the community and they can be sensitive. Many of PNB's highways are also just breaking even. And they are still building 2 new ones - DASH and SUKE - if I am not mistaken.

As above mentioned, LDP and KESAS should be the ones that are more compelling to be purchased back and show that this is the model to go forward towards highway or road charges.

I believe the purchase of the concessions of LITRAK, KESAS, and SMART should be at fair value with some small discounts. A look below shows that the majority of the shareholders for LITRAK for example are owned by funds. I believe except for Gamuda which owns 43.58%, funds own almost 50% of LITRAK.


In buying up assets especially on the part of the government, one should be very careful as it cannot afford to be seen as overpaying while the capital markets be seeing it as non-punishing towards them. A small step that is taken wrong would impact the market as well as the economy on a macro level.

On whether this is value depreciative towards the other highway concessionaires especially like WCE, Ekovest or even Taliworks, I think it should not. To make the transportation fund model (as above) works even better, I suggest for incentives through capital markets such as the ones like Real Estate Trusts (for highways) to be created. From this, renegotiation on toll rates could also be initiated as the companies that are incentivised through various means may even reconsider the pre-negotiated contractual rates. A simple example, the Transport Fund could invest into the listed highways and from there push for "congestion charges" type of model from within. Highways that do that could be incentivised through various means and that could also include maintenance contracts for other non-tolled roads.

In reality, as I see it, after the 9 months in power, the current government is getting a better hold of the situation and understands both segment - people and market economy - much better. As it is, one can see that remarks that are made suddenly has been much reduced. They also do seem to understand that to elevate the current situation, it is not just by giving but in its entirety: the people's cost of living, the business sector, the general economy are intertwined. Even this time around the Gamuda's situation is handled better than the one when part of the package for MRT2 was terminated suddenly.

I am actually seeing more positive signs last few months except for the constant pressure to win by-elections.

6 comments:

reyes430 said...

hi felicty, i have couple of question in regarding to toll abolishment issue

1. on last year, our work minister Baru Bian said that toll abolishment could take up to rm400 billion to complete, but how is that now only cost RM130 billion to RM145 billion, including RM52 billion in debts? Do you have any ideas on why such a large difference?


2. i understand that it is easier to take over the 4 highways under Gamuda as most of them are profit making and concessionaire period are not long. however, what about those stock that are not making money or even worse, still under construction like the west coast of spe highway?


3. can it be best to assumed that the take over price will be using DCF method with less than 10% haircut? since it cannot be done by either overpaid and underpaid.


thank you and looking forward to your valuable feedback.

reyes430 said...

correction on 2

2. i understand that it is easier to take over the 4 highways under Gamuda as most of them are profit making and concessionaire period are not long. however, what about those highways that are not making money or even worse, still under construction like the west coast or spe highway?

felicity said...

hi Reyes

1. I believe the RM400 billion is the total that the government needs to fork out throughout the concession period. Perhaps to take over the toll, it is closer to RM150 billion as mentioned. The RM150 billion may not include maintenance which may come to RM3 to RM4 billion a year. All these adds up. All these adds up. Imagine as mentioned we now have RM1 trillion debt and on paper our debt is around RM650 billion. Hence the acquisition of these highways with additional maintenance costs will not be feasible. Doing that alone the government will be seen as reckless.

2. Non profit making is also possible to be taken over. Some concessionaire may want to dispose. HowwveH over the last few years before GE14 there were some transactions and it seems that the non profit make ones are also being restructured or change hands. Such is the SILK Highway. Remember PNB has thoughts of listing it's highway assets. The ones that are under construction actually there are quite a few. In theory it can be taken over as well.

DCF is one of better method and right method. This is because DCF takes time factor. Other methods do not have that. Which is why the cost plus method as mentioned before is too simplistic.

felicity said...

Sorry for some of the mistakes in grammar and spelling. Typing on mobile

reyes430 said...

Dear Felicity

Thank you so much for your insights! Appreciate

If the take over is done thorough DCF with lets say 10% discount, i think Ekovest is still deeply undervalued, however the market doesnt seem to favour this stocks still. haha

felicity said...

It has to incorporate DCF. Cost Plus is not the right model.

I think sentiment for most of the tolled highway operators are poor. It just has to let that sentiment goes away. Time is always a friend for investors but enemies for speculators.