My word is my bond

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TOLL concessionaires came to focus this week as Amanat Lebuhraya Rakyat Bhd (ALR) extended a conditional offer to acquire four urban toll highways in what was seen as a win-win-win situation for all concerned.

The triple win term was coined with reference to a sound deal whereby everyone benefits.

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In this case, the beneficiaries include the existing toll operators, as they stand to receive some RM5.48bil in total cash, comprising RM3.42bil in equity value and RM2.06bil for the debt portion based on information provided by ALR.

The two biggest gainers from this deal are of course Gamuda Bhd and Lingkaran Trans Kota Holdings Bhd (Litrak), as the former will receive some RM2.33bil for its equity share in the toll highways and realise a gain of RM1bil.

For Litrak, meanwhile, the equity value for its toll highways is estimated at RM2.7bil, translating to an implied equity value of RM5.06 per share as the company will recognise a gain of RM1.38bil in total.

The second beneficiaries of the highway deal are the toll users, as the current toll rate of the four highways will be maintained throughout the concession period and thus saving the highway users some RM5.27bil in total future payments.

By the same token, the third beneficiary is the government as the government will be relieved of any form of compensation to be paid to the toll operators in the future, and net of the future tax forgone, it is said that the government will save some RM4.3bil.

The government also benefits from this deal as the monies set aside for toll subsidies can now be used for other more important expenditures, be it in the form of development or other forms of social assistance.

Is the ALR offer different?

In essence, the ALR deal is sweeter than the one that was presented by the Pakatan Harapan government when the same deal was priced then at RM6.2bil.

The current deal by ALR is at a RM720mil discount or 11.6% cheaper than the 2019 proposal.

According to Gamuda, the difference is mainly due to the time factor as ALR’s offer is dated two years after the previous offer and hence the cashflow from the highways for the two years has now been excluded, as it is realised cashflow.

After all, both the current and previous offers used the same discounted cash flow (DCF) methodology.

In the 2019 proposal, the government intended to de-toll the highways with three staggered rates, inclusive of a toll-free travel period between 11pm and 5am daily.

The proposal then also included a 30% discount at off-peak hours and highway users were expected to pay a congestion charge equivalent to the current toll rate for travel times during six-hour peak periods.

The ALR deal is straightforward, there is no tiered pricing but only one toll rate that will remain stagnant until the concession ends.

The previous deal was of course a government-backed deal whilst the current offer by ALR is a private incentive.

Hence, unlike the previous deal, which would have burdened the government with more debts, this deal is a straightforward private transaction and does not burden the government in the form of fresh borrowings.

Is RM5.48bil a fair price?

There are many ways to look at this, be it on a price-to-book basis, price-to-earnings (PER), replacement cost of the highways, or based on the DCF method, which is the best way to value toll operators.

But as DCF is subject to many assumptions, especially the discount rate to be used as well as traffic assumptions, no one corporate finance person will have the same answer to the value of a project or a concession.

Hence, in the market’s reception of ALR, although cheaper than the previous government-backed proposal by RM720mil, the question of whether it’s a fair price remains.

Figure 1 summarises the current net book value of the highways, the revenue as well as earnings as extracted from Gamuda’s latest annual report.

It can be said that overall, the ALR offer looks “fair and reasonable”. It seems to have matched what most analysts have tagged as the fair value for these assets.

However, there is some element of overpayment, especially for Sistem Penyuraian Trafik KL Barat Sdn Bhd or Sprint assets, which works out at about 3.2 times book value. As a whole, ALR is paying approximately 1.8 times book value and at about 13.5 times historical PER.

The premium ALR is paying to acquire the toll concessionaires is approximately RM2bil against RM2.82bil under the previous Pakatan Harapan proposal.

Christmas comes early

For the concession holders, it’s a windfall gain of RM2bil and effectively taking all their future profits upfront, without having to operate the assets over the remaining concession periods, and the best part, tax-free, as there is no capital gains tax in Malaysia.

For example, according to Gamuda, the company will forgo a future profit of approximately RM170mil from its toll concession business, which is subjected to tax, but at the same time generate a one-time extraordinary gain of RM1bil upfront, untaxed.

In essence, the value of the upfront realised gain is equivalent to almost six years of future earnings. The same goes for Litrak, the listed company, where it will realise a gain of approximately RM1.38bil for the RM2.7bil equity value that is attached to the highway concession it owns.

The unknown factors

ALR is a not-for-profit special purpose vehicle, and in effect, all cash flows generated from the running of the highways will be used to pay the RM5.5bil sukuk that ALR intends to issue.

In a 100% debt-funded deal, the element of certainty in the cash flow is important, as the issuer has to ensure that it has sufficient cash flow generated from the concession to pay profit payments and to build up the redemption sum for the full repayment of the sukuk papers when they mature.

As ALR is not a government-backed entity, nor has it obtained a letter of support from the government for the sukuk issuance, there is no guarantee of profit payments or redemption of the sukuk papers when they are due.

Hence, the profit rate for the sukuk will likely be priced accordingly and will be closer to the current rates that the toll concessionaires are priced today.

Another point to make is with respect to the toll concession period. Figure 2 summarises the current concession period and the new concession period together with the maximum concession period under the ALR proposal.

While there is a chance that some of the concessions may end earlier in 2032 than their original end date, especially for Syarikat Mengurus Air Banjir dan Terowong Sdn Bhd or Smart and the Damansara and Kerinchi Link, the new end-period concession in the year 2032 is longer for both the Kesas and Litrak’s toll highways, which had an original concession end period of 2028 and 2030, respectively.

In addition, as ALR will restructure the sukuk papers to match the new concession period, there is also an additional maximum period of the concession, which extends by between another six and 16 years!

In effect, the maximum period of the concession is now between six and 10 years longer than the original concession period.

While motorists save on the current toll rate as they will be frozen, it comes at a price and that price is a further extension of the concession period as mentioned above. This in essence is the added cost to motorists plying the four highways.

The hope here is of course for ALR to end the concession as soon as possible as it builds up the redemption sum and not to extend the concession period beyond the new end period in 2032.

The idiom “my word is my bond” comes to mind when looking at this scenario as investors will be supportive of this ALR proposal if the tolling ends as early as 2032, not a day later.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.