THE proposed highway buyout deal of the four highways owned by GAMUDA BHD may have its merits, but some questions remain unanswered. One question is whether the government is overpaying for the assets. Then, there is the worry that the government will end up having to fork out more money than the RM6.2bil price tag in the future to ensure the said highways remain ‘de-tolled’.
A week ago, the Finance Ministry made a RM6.2bil offer to take over Lingkaran Trans Kota Holdings Bhd and three other toll concessionaires linked to Gamuda. The highways are Kesas Holdings Bhd, Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd (Sprint), Syarikat Mengurus Air Banjir & Terowong Sdn Bhd (Smart) and the Damansara-Puchong Highway (LDP).
A special-purpose vehicle (SPV) will be created to raise bonds to finance the buyout.
In making his case, Finance Minister Lim Guan Eng provided some figures as to the benefits of the proposed buyout:
> RM5.3bil in compensation payments will be saved by the government for freezing toll hikes,
> RM180mil in annual toll savings for highway users,
> RM18bil in savings in compensation for the highways to not collect any toll charges, and
> A significant share of intra-city highways, as the four highways make up 48% of all toll revenue collected, excluding those owned by the PLUS Group.
Lim has also addressed the question of why the highways are being bought out when their concessions do not have that long to go. He says the highways have toll concessions that expire between nine and 23 years from now. In response, Lim says that with the buyout, highway users will immediately start paying lower toll rates, according to the congestion charges that will save the RM180mil annually.
Under the congestion charge, the government will give discounts of up to 30% for hours outside of peak periods and free travel during off-peak periods. In addition, the maximum congestion charge will be capped at the current toll rate to not further burden the commuters.
Lim also reiterated that once the highways are acquired by the government, their concessions will not be extended, but that upon expiry, congestion charges will still be applicable but at a significantly reduced rate to cover only operating and maintenance costs.
RAM Ratings has given the deal a thumbs up. In a report issued this week, the rating agency said the buyout offer is encouraging news for the local debt market. “The buyout offer is the government’s next best option in fulfilling its election manifesto of abolishing tolls, while still achieving an outcome that meets several objectives. This solution, aimed at appeasing the public while easing the burden on the government’s financials, will put an end to annual compensation payments to the affected highways.”
It added: “From the standpoint of the capital markets and project financing, the financial consideration under the government’s buyout package preserves the interests of the lenders and shareholders. The latter parties are expected to be repaid based on their current outstanding liabilities and respective equity contributions to the said highways. The preservation of investor confidence and adherence to the rule of law – by safeguarding the sanctity of contracts – is critical to the continued long-term funding of future infrastructure projects by the private sector. This will also uphold the orderly operations of the domestic capital markets.”
However, other questions remain unanswered. For starters, what are the traffic flow and toll collection projections under the new congestion charge model? This point is important because it will be these toll collections that would be needed to service and eventually repay the RM6.2bil debt that the government will be taking to fund the buyout of the highways. Lim has said that the collections will be sufficient to “service the debts, including operational and maintenance costs without having to depend on allocations from the Finance Ministry”.
But Pankaj C. Kumar, a former investment and corporate strategy director, points out that toll revenue collections will dip under the new congestion charge and predicts that the SPV owning the highways will be loss-making.
Pankaj reckons that the SPV’s profits will drop to RM175mil per year. He also opines that it will cost the SPV some RM220mil per annum to service its debt, basing this on an average cost of funds of 3.5% for fixed-income papers that carry a maturity of between three and 10 years. This, in turn, will leave the SPV with an annual loss of around RM45mil. However, he does add that the four highways will give the SPV free cashflows of around RM330mil.
That said, Pankaj also points out that traffic flows on the four highways are on a declining trend. He says this based on reported figures over the past year. The said highways have seen an average fall of 2.8% in the last full financial year.
“This alone translates to a drop of around 30,000 vehicles, or a RM31.5mil reduction in annual revenue based on an average toll rate of RM2.90 per vehicle. If traffic flows continue their declining trend, the revenue and profits of the SPV will be even lesser,” he points out.
For the sellers of the highway, though, the deal seems to be a good one.
Several analysts have said that the offer is fair and higher than estimates.
“We think the offer price is reasonable, as the amount does not deviate much from our previous estimate of RM2.5bil,” MIDF Research said in a recent report.
Kenanga Research says it is “mildly positive” on the offer price proposed by the Finance Ministry, as it is slightly above its expectation by RM135.4mil or four sen a share.
“We believe that the positive variance could come from the extended concession period from Kesas, which we previously did not include in our valuation,” the research house says.
Analysts also expect Gamuda to pay a handsome dividend to its shareholders should the sale of the highways go through.
“Following the likely deal completion by the year end, we expect Gamuda to dish out a ‘meaningful’ special dividend to its shareholders,” says UOB Kay Hian Malaysia Research.
It adds that Gamuda may use the proceeds to kick off the Penang Transport Masterplan (PTMP) project, as indicated by the Penang state government.
JF Apex Securities says, “Following the disposal of the four highway concessions, Gamuda will consider declaring a special dividend and reinvest the remaining sum in its new projects such as the PTMP. Assuming a payout of 50% of the cash proceeds from the disposal of the highways, this will translate to a dividend per share of 47.8 sen.”
Pankaj points out that the buyout price of RM6.2bil is at an average of 2.7 times the book value of the assets and at a 14 times historical price earnings multiple. This, he says, means that the government is paying a premium of around RM2.82bil for the assets.
“For the concession holders, it is a windfall gain of RM2.82bil and effectively taking all their future profits upfront, without having to operate the assets over the remaining concession periods. The best part is that their gains are tax-free, as there is no capital gains tax in Malaysia,” he says.
Pankaj adds, “In essence, the rakyat’s RM180mil per annum savings will be equivalent to the concessionaires’ front-loaded extraordinary gains in about 16 years’ time.”
Meanwhile, some quarters continue to voice their dissatisfaction about the proposed buyout.
Datuk A. Kadir Jasin, the media adviser to the Prime Minister, has written on his Facebook page that the Pakatan Harapan government should be more thorough in scrutinising the proposed purchase of Gamuda’s highway assets.
"Some say it's a win-win deal. Others aren't so sure. The latter says it's cheaper to compensate Gamuda for non-toll collection than to buy the four highways outright, at an amount less than the proposed purchase price.
"In any case, the highways will revert to the government in about 10 years when the concession period ends," said Kadir.
Some industry sources also point out that the Gamuda highway buyout puts pressure on other toll concessionaires, as users would gravitate away from higher toll roads to the ones under the congestion charge.
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