PLUS Malaysia Bhd is a national asset owned by all Malaysians via UEM Group Bhd’s 51% stake in the company, which in turn is wholly-owned by Khazanah Nasional, the government’s sovereign wealth fund.
The Employees Provident Fund (EPF) is the other 49% shareholder in PLUS and as the EPF has more than 14 million members, these members are indirect owners of PLUS too.
Both UEM and EPF completed the acquisition of PLUS for a staggering RM23bil in cash in January 2012. Today, PLUS owns several concessions and they include the North-South Expressway, the New Klang Valley Expressway, the Federal Highway Route 2, the Seremban-Port Dickson Highway, the North-South Expressway Central Link, the Malaysia-Singapore Second Crossing, the Butterworth-Kulim Expressway, the Penang Bridge and Lebuhraya Pantai Timur 2 (LPT2). All in, PLUS owns a total length of 1,170.5 km and with the exception of LPT2 concession, which expires in 2034, all other concessions expire in December 2038 – a little over 19 years from now.
Ever since PLUS was taken private in 2012 by the government and the EPF, there have been numerous attempts to buy it over from the present shareholders by several individuals via their respective vehicles and in return, providing “sweet deal” to not only the current shareholders but to highway users in the form of a freeze in toll rate hikes, potential discounted toll rates but with extended concession periods.
As a concession holder, PLUS generates revenue from mostly toll collection and after paying for running expenses and interest on its debts, its free cash flow is mainly used for dividends. Based on audited 2017 figures, PLUS generated some RM3.8bil in revenue and it is a strong cash cow for its shareholders, generating some RM2.6bil in operating cash flows.
After the payment of capex and repayment of debts, it had about RM0.8bil in free cash flows for distribution as dividends to shareholders. However, for 2017, PLUS reported a pre-tax loss and net loss, as its bottom-line was impacted by the amortisation cost of the concession acquired in 2012 as a non-cash item. This one-line item alone results in a charge of about RM1.1bil to its income statement in 2017.
Despite paying RM690mil in dividends to its shareholders, PLUS’ cash reserves remained strong and in excess of RM3.3bil as at end of 2017.
Majority of consumers do benefit from the dividends that are paid by PLUS to its shareholders. EPF and UEM Group, whose actual owners are all of us – members of the EPF and all Malaysians via the government’s ownerships of Khazanah Nasional.
For EPF, dividends received from PLUS makes up its investment income, which is than distributed to members as dividends, while for the government, the dividends received from Khazanah is deployed for operating and development expenditure.
Should PLUS be sold?
The Pakatan Harapan’s promise in its manifesto in the 14th general election (GE14) was to abolish tolls and it intends to review all toll agreements and renegotiate to derive best value for money for the consumers with the ultimate aim of abolishing tolls gradually.
The recent proposed acquisition of the four urban toll highways is a testament to the government’s commitment of not only ensuring no more toll hikes but for consumers to enjoy lower toll rates during off-peak hours and this will cease upon the expiry of the current concession periods for the four highways.
It is believed that Maju Holdings, who had earlier attempted to acquire PLUS for RM36bil in 2017, is now knocking on the door for the second time. It’s proposal, according to a financial weekly, although entails a reduction in toll rates, calls for a longer concession period of between 10 and 30 years from the current concession period that ends in 2038.
In addition, the toll reduction is said to be carried out over a six-year period while the highways would be fully lit up at a cost of RM5.3bil.
The proposal also entails the government maintaining its debt guarantee throughout the concession period and the extended period as well. Based on PLUS’ 2017 audited accounts and Malaysian Rating Corp Bhd’s (MARC) rating report, out of the RM30.2bil PLUS’ debt papers, RM11bil are government guaranteed while the balance RM19.2bil papers are rated “AAA” by MARC.
Should PLUS be sold to Maju Holdings? What does it mean in the context of Pakatan’s manifesto and its promises? Indeed, the proposal is seen as detrimental to all Malaysians as the proposal requires the government to maintain its debt guarantee for not only the concession period but for the extended period as well.
Question is, will the potential new shareholder be able to raise the RM30.2bil bonds based on its own credit profile and reputation in the capital market without seeking the government’s additional support to provide 100% guarantee on the debt papers?
Ironically, there was a rating downgrade on Maju Holdings’ wholly-owned subsidiary, Bright Focus Bhd’s (BFB) RM1.35bil sukuk papers from “A1” to “BB1” and at the same time placed on negative watch early last month by Rating Agency Malaysia (RAM). The rating agency further highlighted that the downgrade is based on the severe impairment in BFB’s debt-servicing metrics following further unanticipated advances by its 96.8%-held subsidiary, Maju Expressway SB, to the ultimate parent company Maju Holdings, in addition to a deterioration in Maju Expressway Sdn Bhd’s (MEX) projected annual cash flow.
Based on RAM’s rating rationale, an entity rated “BB” has a weak capacity to meet its financial obligations and highly vulnerable to adverse changes in circumstances, economic conditions and/or operating environments.
By the way, when a company’s paper is downgraded to “BB” level, most investors will shy away from the exposure to these papers as “BB” is deemed to be non-investment grade.
Operationally, while Maju Holdings has the experience in running MEX, it’s 26 km dual carriageway, it is a pale shadow to PLUS’ massive 1,1070.5 km network.
What PLUS invests in its highway network, inclusive of the massive rest areas, widening of roads and maintenance for an aged highway, is not the same as the relatively new kid on the block.
Hence PLUS’ maintenance cost can be much higher than MEX, when measured on a per kilometre basis.
The fact that the government has taken steps to nationalise privately-held assets via the proposed acquisition of the four urban toll operators and proposed reduction in toll rates without extending the respective concession periods suggests that selling PLUS to Maju Holdings will be in contradiction of the government’s intention to reduce the cost of living and abolishment of tolls in time to come.
Should the government plan to nationalise the 49% not already owned, it should be discussing with the EPF to acquire the stake. Engaging Maju Holdings for the disposal of the 51% stake, whose main purpose is seen as free cash flow generation for an extended period of time, and on top of having the government to possibly take on higher debt guarantee, defeats the objective of Pakatan’s manifesto and its promises to the people.
Worse, what if Maju Holdings uses these strong free cash flows to its parent company as advances, like how Maju Expressway has done so and as highlighted by RAM?
But, if the reason why we are seeing fresh bids on PLUS is due to its attractive and recurring strong cash flow, any potential investor would have to be an investor with deep pockets and has the ability to raise the necessary funds to acquire PLUS on a willing buyer-willing seller basis and without the government having to provide any guarantee whatsoever.
In conclusion, selling PLUS to Maju Holdings is not the solution to fulfil Pakatan’s election manifesto neither for the benefit of the people. After all, just two days ago, the Finance Ministry made a preliminary decision to oppose the takeover of PLUS by Maju Holdings after considering the views from Khazanah and the EPF.
In addition, the government should not be selling a company with a “AAA” rating to another corporate which has a “BB1” market rating and worse, below investment grade.
Just leave PLUS alone.
The views expressed by the writer is solely that of his own.
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