Saturday, June 6, 2020

Why some highways are less profitable

I do not quite agree when we put it that it is very difficult to project the cashflow projections of highways. Unless we are talking of flying cars and changing habits over transportation over the next 30 - 40 years, this business will be more consistent than many businesses. Yes, we do not know what the future entails but so are many other businesses. As long as cars, trucks and buses are not replaced roads will still be used.

I have been asked on why then some of the highways are not profitable or rather seemed to be not or less profitable. Take a read over this news - PLUS Expressway's profits for FY2016 was RM288 million i.e. not great for a company this size.

For FY2010, let me show what the number was. FY2010, it was already doing RM1.3 billion PAT. What happened then?

Did the traffic dropped. It obviously did not drop. By 2019, PLUS was already doing RM4 billion revenue. Let's look at this news. Post delisting, PLUS raised a RM30 billion debt. Much of the money went back to the short term funds raised and for repaying to EPF.

I provide a simple P&L calculation as below. Let's assume a project in middle of its concession and the P&L is as provided below. If the cashflow is consistent, I do not need to do much, many Investment Bankers will be approaching the company.

With good ratings, the funding rate would allow the owner of the business to take money upfront and use the funds to venture into other projects. So, when people like Warren Buffett says he has $130 billion cash, it does not mean he has no debt, he has carved out his good assets such as the utilities and made available funds for his other acquisitions. So is YTL.

Let's say the highway has 20+ years to run (and revenue is growing), when approached, the company would raise a RM20 billion debt at probably 5% and the P&L would look like below.

Now, immediately the profits is now 0. Of course, overtime the profitability would increase as it is needed to pay principal for the debt instrument but we usual investors are probably being misrepresented if we do not know the actual exercised behind it. Usually, this kind of projects may be candidates for delisting and then relisting.

The similar situation was probably seen for MTD Capital (which went delisting as well in 2011), the owner for East Coast and KL-Karak Highway.

Today, as provided to me, ECE and KL-Karak Highway together are not making much profits which is not true in actual cashflow per se.

This the reason why I mentioned of cashflow rather than profits for concessions such as highways.


CC said...


i think you are quite wrong on this one.

felicity said...

This article is to defend that article

CC said...

On your frontloading.

Do note they are alot of if's.

But you cannot take PLUS one as an example. That one is a complete sweetheart deal with the govt and EPF and Khazanah.

Unless you can get government to Guarantee the junior bonds, that kind of level of leverage is now possible.

However, if traffic is good, its definitely possible. But this is a big if.

Take it how you like. I work in the toll industry, and im very aware of all the new dynamics described.

However, like choivo said in his article, it may very well be cyclical, but i dont think so.

CC said...

now impossible*

CC said...

on the KL-Karak, that is a fair point.

However, do note by that point, the highway was already more than 30 years old and fully paid off.

WCE is just starting, it will need to pay down the debt first, before they can frontload again.

Unless traffic is utterly amazing, even then its more likely that someone buys shares in the company from WCE than a complete frontload. This is referencing Ekovest.

felicity said...

not sure what you meant by junior bonds. The financing is completed.
The Project is part financed via borrowings, including a Government support loan of RM2,240.0 million, syndicated term loans from licensed financial institutions of RM1,500.0 million and the issuance of debt securities, Sukuk Murabahah Bond of RM1,000.0 million (guaranteed by Danajamin).