Saturday, October 26, 2019

Why the fundamentals for WCE does not change much

When I bought this share 6 years ago, I was looking really long term. Today, that mindset does not change. Sure enough, today the project faces some blip - not entirely due to the current government as they have promised the elimination of toll but also because there was a dispute over the alignment prior to that. Now, let us review what actually had happened and probably I will go through the bad news first.

Early delays

The alignment for Phase 7 had been changed as earlier the concessionaire faced a dispute from the government then on the alignment. Since then, it has been solved (after the change of government). This has caused delay in that phase and since it is a 50 + 10 year concession, the affect does not change much. Probably the biggest change was the cost of land acquisition has increased.

Threat over toll elimination by current government

I have written a piece on this after the change of government on May 9. So far, what is negative since then for WCE is that they have yet to collect toll despite completion certain sections. What was sort of promised by the government i.e. to eliminate tolls and force it onto the concessionaires i.e PLUS, Gamuda etc. did not happen. In fact, Gamuda's concessions is being bought at a fair price. In the event WCE is being forced to sell, they would be selling at a fair price as well.

Anyway, as we can see the government may not have the funds to purchase many of the concessions. Hence, it is possible the government is using Khazanah to purchase them. My question is this, if the idea of the current government is to privatise businesses, then this action acts on the opposite. Khazanah buying the concessions, would also mean they are collecting toll as well. Anyway, in the event Khazanah is buying, I think it is a a fair price of the concession, hence much higher value than what is being traded at - for WCE.

PLUS is being reviewed i.e. reduced toll rates

As in the Budget 2020, the government has promised that the toll rates for PLUS is reduced at least 18%. Well, it shows how profitable PLUS is. Despite not increasing the toll rates every 5 years, it can now afford to reduce the rates. Given the situation, I am not sure who will get (to purchase) the concessions, but surely we as EPF contributor is affected by the reduced rates collection.

The affect to WCE is probably minimal as I do not think over a long distance (from Shah Alam to Penang) driving the drivers would bother over few ringgit savings.

Increased value in land purchase

To me, this is the biggest negative, as it affects the pocket directly. Anyway, as mentioned in the prospectus, the land purchase deals 95% of them have been completed. What is done is done. WCE is disputing some of the acquisitions in court and it seems to be able to win a portion of it.

The increase in equity injection would affect the calculation of IRR in the project - assuming it is decently profitable around 10%. Any increase in equity would change the IRR and if we can remember the project has a IRR hurdle where in the event the concession's profits exceeds certain threshold, it is supposed to share a higher portion of the profits with government.

In the long run, hence the additional injection would not change much fundamentally given the IRR scenario.

Partial completion of the highway

This is the good part. It shows that the project is on the way and WCE is able to complete it. There is no reason to not believe they are capable of constructing despite the small situation over at Phase 4.

This project which has been talked about for so long is now really moving. The biggest beneficiary is Perak especially Lumut and I am sure many are waiting for the completion.

It is a long term project

Again, whatever the share price changed in the short term, there is little impact. At the moment, WCE has yet to collect toll so the financials that we see on quarterly and annually basis is no relevance. The biggest relevance is the costs and progress of construction.

Losses in the first few years

I have been asked on this, and would like to clarify. Profit and losses is not the main basis for calculation, as it is accounting (little bit deep to write in this article). What is important after the project is the cashflow. As an example, PLUS today on paper is making losses and I have read the Minister in past gladly presented the loss making fact (this loss actually is good for PLUS owners given the tax planning situation).

Let me put this in perspective, if it is making losses, why are there so many wanted to offer the purchase of PLUS?

Post 2038

There is potentially one big factor when PLUS is taken out of the tolls collection. Although PLUS is a parallel highway to WCE, there are various trends which is positive for WCE. One of them Pulau Indah port. WCE is closer to Pulau Indah, and the government is developing those areas. It is encouraging the expansion of the ports or even a new one. By then, given the development, WCE will have its own additional strength. As mentioned in past by the management, WCE's strength is its flat terrain which is a bonus for heavy vehicles.

I believe the traffic is so heavy by 2038 that, PLUS will be quite badly congested that we would have needed an alternative highway anyway. Hence WCE. I have also seen the maintenance of a non-tolled highway in Malaysia - which is not a good sight.



5 comments:

Antonio said...

Felicity, always delightful to read you. I wish you could further explain why the Cash Flow can be good despite (accounting?) losses. Meaning the depreciation is huge and that always makes them being in the red, but the FreeCashFlow is always positive because they collect more than they spend in maintenance??

felicity said...

Yes Antonio, largely depreciation and interest expense. They would not be always in the red. Eventually the P&L will catch up onto the cashflow.

The first few years, the maintenance costs will be rather low.

Lilian said...

Felicity, what is your view on the RCPS which is offered at 0.24 when the mother share is trading at a mere 0.31. I am not sure the conversion price of the preference shares, but it looks like this RCPS is not worth subscribing, what do you think? Value your opinions.

felicity said...

There is a warrant at 1 for every 4 subscribed. Hence, with the warrant may seem worthwhile.

Bn911 said...

Better buy more parent share...safer and less hassle.