PETALING JAYA: Uncertainty over how the government will handle the announced highway takeovers has spooked investors, sending the share prices of listed highway concessionaires tumbling.
Among the counters that were hit was GAMUDA BHD, with which the government said it had begun talks to negotiate the acquisition of concessions for four main highways in which the group owns majority stakes.
The highways included the Shah Alam Expressway (Kesas) and the SMART Tunnel, in which it owns 50% and 70% direct stakes.
The others are Lebuhraya Damansara Puchong (LDP) in which it has a 43.6% stake via its 43.6% stake in Lingkaran Trans Kota Holdings Bhd (Litrak) and the Western KL Traffic Dispersal Scheme (Sprint), in which it has an effective stake of 51.8% (a 30% direct stake and a 21.8% indirect stake via Litrak).
Gamuda shares fell 18 sen or 5.92% in a knee-jerk reaction yesterday, closing at RM2.86 following the Prime Minister’s Office’s announcement on Saturday.
The worst-hit counter yesterday, however, was Litrak, which lost 43 sen or 9.3%, closing at RM4.17.
Gamuda, in a filing with the stock exchange yesterday, confirmed that it was in talks with the government in relation to the proposed takeover.
“As the board of directors of Gamuda have a fiduciary duty to deliver fair and reasonable value to all its shareholders, Gamuda has to ensure that the proposed transaction would be based on market valuation norms and practices,” it said in the filing, adding that further announcements would be made later.
CGS-CIMB Research, in a note yesterday, said checks with Gamuda had indicated that initial negotiations would be on a willing buyer-willing seller basis.
“At this juncture, the company foresees no risk of forced acquisition or expropriation,” it said.
However, depending on how negotiations pan out, the continuity of highway concession revenues and earnings was a longer-term concern, it said.
Without this, Gamuda would be left only with construction and property as its two main business segments.
As of the first quarter of financial year 2019 (FY19), Gamuda’s water and expressway concessions made up 42% of its pre-tax profit. Property development made up 18%, while construction and engineering constituted 41%.
“The deal would be negative to Gamuda if the valuation/offer price does not take into account the future earnings of the toll concessions or does not compensate Gamuda for the loss in future toll revenue over the remaining period of the concessions,” it said in a note.
The research house added that it was too early to conclude if the government would invoke the expropriation clause, “but the risk of such a move should not be discounted at this juncture”.
In May last year, CGS-CIMB noted that the expropriation clause, which is of national interest, was inserted in all highway concession agreements.
According to the report, the government only needed to provide the operators with a three-month notice.
As for Litrak, which owns the LDP and a 50% stake in Sprint, MIDF Research said while it was initially aware of the possible takeovers, the move had come sooner than expected.
However, it has maintained its “buy” call on the counter, with an unchanged target price of RM4.92, saying Litrak was still a defensive play with decent dividend yields of 7.3% for FY20.
The research house expected the impact to Litrak’s earnings to be net negative, as the move would result in an earnings vacuum.
“However, we opine that it is too early to ascertain the impact, as we are lacking details,” it added.
Taliworks holds two concessions, including for the Cheras Kajang Expressway, while IJM Corp holds four, including one together with WCE HOLDINGS BHD for the West Coast Expressway.
Ekovest Bhd shed 3.5 sen to close at 56.5 sen, while WCE Holdings was down 2.5 sen at 52 sen.
RHB Research, in its report on the construction and engineering sectors, said the government’s recent acquisition of the Eastern Dispersal Link Expressway from MALAYSIAN RESOURCES CORP Bhd could be used as a precedent in determining the buyout price.
For that transaction, the settlement sum of RM1.32bil was based on the total cost of developing the highway, known as highway development expenditure. It said, this method could undervalue toll concessions.
“We believe that a middle ground can be established if both parties are able to agree on a price that takes into account a reasonable rate of return on future cash flows,” it said.
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