IPO details. Perak Transit’s IPO (set to list on 6th Oct-16) on the ACE market, with a market capitalisation of RM171.4m (based on an IPO price of RM0.15/share), is raising RM36.8m in proceeds to fund a new bus terminal in Kampar. At the helm of the management team is Dato’ Sri Cheong Kong Fitt, who has over 20 years of experience in public bus terminal operations. Postlisting, major shareholders will have a sales moratorium of six months, lending confidence to shareholders.
Dominating Ipoh’s bus travel due to high barriers of entry. Perak Transit’s main terminal, Terminal AmanJaya at Ipoh stands to dominate due to the high barriers of entry as it is the only gazetted bus terminal in Ipoh, implying that all express bus services operating in Ipoh are mandated to pick up and drop off passengers in Terminal AmanJaya. Perak Transit owns 97.8% of market share in Ipoh’s stage bus passenger ridership.
Quasi-recurring income model provides defensive earnings base. Perak Transit’s main revenue driver consists of: (i) The Integrated Public Transportation Terminal (IPTT) which makes up 78% of gross profit due to its high margins of 87%, followed by (ii) Public Bus Services (19% of gross profit), and (iii) Petrol Station Operations (3% of gross profit). Out of the Group’s earnings, 50% of the quasi-recurring income are from A&P, 5% from rental of shops, and 19% for public bus services, which in total makes up 70- 75%% of the group’s gross profit. They also enjoy tax breaks resulting in low effective tax rates of 9-7% in FY16-18E.
A&P a cash-flow and margin generator. The Group’s two contracts for rental of its A&P space is the main driver for its IPTT division (60-65% of IPTT revenue) which we believe will drive growth for PAT margins going forward as it commands double digit reversions YoY, and the Group can continue to expand promotional spaces within the terminal without incurring major cost.
Forecast earnings of RM27.1-RM31.1 for FY17-18E mainly from A&P revenue growth, additional 25 buses in FY17, while the project facilitation fee remains the icing on the cake. We are expecting bottom line margins to expand in FY17, and estimating 30.2-32.1% PAT margins in FY17-18E from continued growth in the A&P revenue YoY, and on the back of lower effective tax rates (9%,7%,7% in FY16,FY17E,FY18E) derived from tax benefits received. A dividend pay-out policy of up to 25% translates to FY17-18E DPS of 0.59-0.68sen (4.0-4.5% yield based on the IPO price of RM0.15).
DDM-driven Target Price of RM0.22 with total return of 52.6% (7.69% discount rate; 3.19% 5-year risk free rate). Our TP implies FY17E PER of 9.4x. There are no direct comparable but given its quasi-recurring income base, we back tested our valuation method against small cap (
Source: Kenanga Research - 20 Sep 2016