Govt takeover of highways on willing buyer-willing seller basis

File pic of vehicles approaching the toll plaza on the LDP near Bandar Sunway.

KUALA LUMPUR: The federal government’s plan to take over the tolled  highways will be on a willing buyer-willing seller basis, according to CIMB Equities Research’s brief check with Gamuda Bhd.

In its research note issued on Monday, it said at this juncture, Gamuda foresees no risk of forced acquisition or expropriation.

“Depending on how the negotiations pan out in the coming weeks or months, a longer-term concern is the continuity of highway concession revenue and earnings, which, if forgone, will only leave construction and property as the two main business segments.

“As at 1QFY7/19, water and expressway concessions made up 42% of total group pretax profit. Property development made up 18% while construction and engineering constituted 41%. Valuation of toll highways make up 27% of our FD RNAV,” it said. 

CIMB Research said pending more details on the negotiations and valuation methodologies for the potential highway takeovers, the impact on earnings, RNAV and target price is unquantifiable at this point. It maintained its FY19-21F EPS forecasts.

Last Saturday, the Prime Minister’s Office (PMO) announced that the government has commenced talks with Gamuda to negotiate the acquisition of highways in which the company has a majority stake.

According to the research house, this points to a potential takeover of all four of Gamuda’s highway assets, comprising 1) Lebuhraya Damansara Puchong (LDP), 2) Sistem Penyuraian Trafik KL Barat (SPRINT), 3) Lebuhraya Shah Alam (KESAS), and 4) SMART Tunnel.

The ultimate objective of the takeover negotiations is to enable the government to abolish toll collection in stages, in line with its election manifesto.

“The re-emergence of this news is a surprise. In August 2018, Works Minister Baru Bian announced that the government would defer the nationwide abolishment of tolls until the country’s fiscal conditions were more permissive.

“In our view, whether this news is positive or negative to Gamuda depends on the takeover deal. The deal will be negative to Gamuda if the valuation/offer price does not take into account the future earnings of the toll concessions or, rather, does not compensate Gamuda for the loss in future toll revenue over the remaining period of the concessions,” it said.

CIMB Research said the takeover deal is unlikely to be attractive to Gamuda if it does not adopt the discounted cash flow (DCF) method.

Based on the press statement from the PMO, it is too early to conclude if the government will invoke the expropriation clause but the risk of such a move should not be discounted at this juncture, in its view.

In theory, expropriation will be the most ideal methodology and the least costly method of highway takeovers as it accounts for the construction cost, government grants, and after deducting for dividends, among others.