PLUS needs to ensure the public does not lose out

SOME might say that the hard part of the toll restructuring plan for PLUS Malaysia Bhd will now start. And given the implications of the various facets of the changes that need to be done, it will have far-reaching consequences for the public.

Questions are now being asked about the financial impact of dividends of the toll reductions as there will be multi-faceted influence on PLUS and its shareholders.

For PLUS, the biggest highway company in the country, its revenue will take a near-term hit with an 18% reduction on toll rates. Traffic growth will take some time to compensate for the loss in revenue and it will now have to ride on planned growth on non-toll revenue to fill up the gaps.

It will also have to bear with the ever-rising cost of operating and maintaining a network of highways. Costs rarely come down and over a period of 38 years, the balance between recouping lost revenue and maintaining the high standards of roadworks and maintenance will come into play.

But PLUS has voiced its confidence in carrying out its scheduled maintenance works with no reduction on quality despite a cap on toll rates.

For the public, dividends it gets through the 49% ownership in PLUS by the Employees Provident Fund (EPF) will see a near-term hit given the lesser dividends PLUS will pay to its shareholders.

“I am sure it will affect them as EPF will get less dividends from PLUS, ’’ says Tan Sri Ramon Navaratnam the chairman of Asli Centre for Public Policy Studies.

The government announced on Thursday that it will not sell PLUS, thereby ending months of intense lobbying for PLUS. The shareholding remains status quo, with Khazanah Nasional Bhd and EPF holding 51% and 49% stakes respectively.

There will be an 18% toll reduction effective February this year until 2058 for PLUS highways. To compensate for the toll reduction, the concession period for PLUS highways is extended by 20 years from 2038 to 2058.

For Khazanah and EPF, PLUS generates enough money to pay about RM800mil yearly to both the shareholders.

According to EPF’s 2018 annual report, it received RM220.5mil for 2018, down from RM343mil a year earlier in dividends from PLUS.

From 2015-2017, it was reported that PLUS has paid dividend of between RM700mil and RM815mil annually to its shareholders.

EPF’s gross investment income was RM50.8bil for 2018. It paid 6.15% in dividends to its members in 2018, and will announce its 2019 dividends in a few weeks.

EPF reported a total investment income of RM13.5bil in the third quarter ended Sept 30,2019 which is a drop of 7.6% from the same quarter a year ago. The decline was due to operating in uncertain and volatile equity markets which had worsened since 2018.

EPF has 7.59 million active members and their dividend is much higher than what risk-free bank deposit offers. Over the past decade, EPF’s dividend rate has not been less than 5.65%. EPF chief executive officer Tunku Alizakri AliasEPF chief executive officer Tunku Alizakri Alias

“This decision (to maintain the status quo of PLUS shareholding) is a clear indication that the government is appreciative that the interests of our 14.6 million strong EPF members must be protected at all times. The reduction of toll is an added benefit for the majority of our members as they make up a good number of the 1.7 million daily PLUS highway users, ’’ says EPF chief executive officer Tunku Alizakri Alias in a statement issued yesterday.

Affin Hwang Investment Bank Bhd senior analyst Loong Chee Wei feels for the government... it is about striking a balance between social obligations and making money by selling assets.

“For EPF contributors, it is more important the government retain the shareholding status quo. It will be worse off if the assets were sold to a private party whose objective is to make money. This way, the government is meeting the objective for the benefit of the country and EPF contributors, ’’ says an analyst.

But EPF has other investments both in the domestic market and overseas.

It was reported that EPF’s return from its overseas markets has far outweighed the gains from its domestic investments even though the overseas portfolio only makes up less than 30% of its total assets under management.

Ramon says “EPF can always invest in other areas. They don’t have to depend on PLUS’’.

Ramon adds: “I am actually glad this prolonged discussion after the Pakatan Harapan manifesto was published has been settled. I don’t think we can please everybody all the time. This is a package and it might be generally acceptable than others.

“But I am disappointed that the private sector is not given a major dominant role to play in the ownership of PLUS.’’

The toll reduction somewhat meets the promise Pakatan made to the electorate. But this deal also saves the government a lot of money it will otherwise need to pay in compensation to keep toll rates flat. The government forecast it would have to pay PLUS RM42bil in compensation in the future if this deal was not done.

Khazanah managing director Datuk Shahril Ridza Ridzuan in a statement says “we recognise the complexity in meeting the demands of multiple key stakeholders, especially the people of Malaysia. The decision to reduce the toll rates for PLUS highway users while providing considerable savings for the government is a significant move”.

“In addition, entrusting PLUS to its existing shareholders will ensure that the high standards of safety, comfort and convenience currently enjoyed by users will be maintained. We now move forward to discuss the implementation of the initiative with all other stakeholders, ’’ he adds.Restructuring PLUS

The good news for PLUS highway users is that the toll rates will be stagnant for 38 years. The bad news is that they now have to pay toll for a longer period up to 38 years from 18 earlier.

“Road users cannot be made to keep paying higher toll rates when the cost of living is rising. They end up losing. If they keep toll rates the same and as income and inflation goes up, users are in effect better off than now, ’’ Loong says.

It has also become unsustainable for the government to keep compensating PLUS every time there is a scheduled rate hike. Under the original agreement, PLUS gets a toll hike every three years or so and over the years the government did not allow for hikes but in turn compensated PLUS with longer concession periods and funds.

Had the hikes been allowed over the years, the current toll rates would have been much higher and the 18% discount would have been on a higher base rather than the current rates.

The government currently owes PLUS RM2.7bil in compensation.

PLUS is the toll concessionaire of five major highways in Malaysia, of which the 772-km North-South Expressway (NSE) is its key highway in terms of revenue generation. PLUS’ portfolio comprises the New Klang Valley Expressway, NSE, North-South Expressway Central Link, Malaysia-Singapore Second Link, Butterworth-Kulim Expressway and the Penang Bridge.

Now that PLUS is going to be earning less and paying out less dividends, it cannot compromise on the safety and maintenance of the highways.

“What it needs to do is look into new ways to boost its income and work on better efficiency without compromising on quality of services, ’’ says an analyst.

PLUS spent RM1bil in 2016 to maintain its network of highways in the country and that is the kind of money it will have fork out to keep the highways safe for users.

PLUS earned RM3.83bil in revenue and reported an after-tax loss of RM93.53mil for the financial year (FY) ended Dec 31,2018. A year earlier it made a after-tax loss of RM101.46mil on the back of RM3.99bmil in revenue.

In comparison, in FY16, PLUS recorded a net profit of RM288.21mil on the back of RM4.07bil in revenue.

PLUS also has debts of RM30.2bil, including RM11bil that are government-guaranteed. PLUS’ yearly debt repayment is about RM300mil. This will go up to RM500mil this year and will rise further from 2024 onwards, when it doubles to RM1bil.

However, the net losses does not imply that the company is having financial difficulties when PLUS still has a strong cashflow and the ability to service its debts.

According to a report by Malaysia Rating Corp, it had free cash flow of RM1.64bil for the first nine months of 2018.

“Now it is a matter of how it restructures the company and its bonds so that PLUS can service its debts without burdening the government or users and the dividends payouts to its shareholders especially EPF are not affected, ’’ says an analyst.

PLUS will have to sit down with the government on its concession agreement for the 20-year extension.

A report suggested the restructuring will entail the securitisation of its future cash flow estimated at RM7.5bil and a special purpose vehicle (SPV) will be set up to undertake the securitisation exercise.

The report said the estimated value of PLUS’ future cash flow forecast was based on a 1% growth rate in annual traffic.

“To make up for the shortfall of toll collection from the 18% rate cut, the government will step in to guarantee the concessionaire’s debts amounting to about RM22bil, on top of RM13bil that it has already guaranteed. The government’s fresh guarantee will help PLUS to reduce borrowing costs as well as enable it to free up cash that is required to maintain PLUS’ AAA bond rating, ’’ the report says.

It added that the government will be a shareholder in the SPV.

“The immediate cash flow will be reduced because the revenue will be reduced with the 18% toll reduction. But they can stretch the bonds to match the tenure of the new concession period.

“If extended, the repayment period will be for a longer period and the cash flow generated should be sufficient to pay for the bonds, ’’ says Affin Hwang’s Loong.

He believes the interest expense will be lower in the future and that will off set against the lower toll collection.

It was reported that PLUS last restructuring was in 2012 which ended in the refinancing of PLUS financial obligations via the issuance of a RM23.35bil sukuk and RM11bil government-guaranteed sukuk.

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