EKOVEST (8877) - A case of monetising future earnings

EKOVEST (8877) - A case of monetising future earnings

This article first appeared in Corporate, The Edge Malaysia Weekly, on September 26 - October 2, 2016.

BY selling a 40% stake in Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd (Kesturi) to the Employees Provident Fund (EPF), Ekovest Bhd is expected to receive RM1.13 billion cash.

A sum of RM921 million will be paid upon completion of the sale. When the certificate of practical completion for the Duta-Ulu Klang Expressway (DUKE) Phase 2 is issued, the EPF will pay another RM60 million. The remaining RM149 million is subject to the achievement of the pre-agreed targeted returns in the event of certain exit scenarios.

In short, RM981 million will go into Ekovest’s coffers soon.

In an earlier interview with The Edge, Ekovest managing director Datuk Seri Lim Keng Cheng revealed that some of the proceeds would be set aside for a special dividend to reward shareholders. He, however, stopped short of specifying the quantum.

Ekovest’s borrowings stood at RM2.19 billion as at June 30, with a net gearing of 1.67 times.

UOB Kay Hian analyst Ridhwan Effendy says in a research note that the disposal helps unlock the value of a vital urban traffic dispersal system. He  points out that transaction amount implicitly values the expressway at RM2.82 billion, compared with Ekovest’s market capitalisation of just RM1.69 billion.

Tan Sri Lim Kang Hoo is the single largest shareholder of Ekovest with a 32.38% stake, followed by Datuk Haris Onn Hussein, the brother of Defence Minister Datuk Seri Hishammuddin Hussein, with 13.84% via Kota Jayasama Sdn Bhd.

Assuming that the proceeds will be used proportionately for the repayment of debt, reinvestment and payment of the special dividend, one-third of RM981 million, or RM327 million, would be for the latter.

With his 32.38% stake, Kang Hoo would stand to receive RM105.88 million in dividends,  and Haris, RM45.3 million.

Kang Hoo has been in the news quite often since he clinched a deal with 1Malaysia Development Bhd to take part in the development of Bandar Malaysia in Kuala Lumpur.

The tycoon owns Credence Resources Sdn Bhd, which holds a 60% stake in Iskandar Waterfront Holdings Sdn Bhd (IWH). IWH has formed a joint venture with China Railway Group Ltd to acquire a 60% stake in Bandar Malaysia Sdn Bhd for RM7.41 billion, which will be paid in several tranches.

Kesturi is the concession holder of DUKE. In August 2004, the company obtained the 34-year concession, which commenced in August 2005. In December 2012, Kesturi entered into a supplementary concession agreement (SCA) with the government and saw its concession period for DUKE and DUKE Phase 2 extended to 54 years, commencing from August 2005. The concession period could be extended for a further 10 years, subject to the terms and conditions of the SCA.

Ekovest, meanwhile, has been granted a 53½-year concession to build, operate and transfer the 50km Setiawangsa-Pantai Expressway (SPE) (formerly known as DUKE Phase 3). However, Kesturi does not own DUKE 3.

The deal has been met with criticism. Among the questions raised is why the 30% stake in Kesturi was not offered to the EPF when Malaysian Resources Corp Bhd sold its equity interest to Ekovest for RM760 million in 2014.

Some quarters are questioning the rationale of the sale and valuation. It probably cannot be denied that the divestment will help Ekovest unlock asset value while remaining in control of the toll highway.

A source familiar with the deal explains that the provident fund’s investment mandate does not allow it to buy greenfield projects. “Back then, DUKE was considered a greenfield project.”

The future earnings of DUKE are understood to be attractive. The projections have convinced institutional funds to subscribe to its RM2.3 billion Islamic medium-term bonds issued in 2013.

DUKE Phase 1 is expected to see traffic volume growth of 10% in 2017, 5% in 2018 and 2% from 2019 onwards until 2059. For DUKE Phase 2, traffic volume is projected to grow at a high 35% in 2018 before moderating to 10% in 2019, 7% in 2020 and 5% from 2021 to 2028. From 2029 onwards, the projections assume 30 years of stable growth of 2%.

A source from the EPF discloses that the provident fund is expecting a low teens internal rate of return from the investment.

“It looks like a fair deal with the amount of capex spent on DUKE Phase 2. The actual traffic volume has also narrowed closer to the traffic projection and even surpassed it since 2014. Based on my conservative discounted cash flow model, the value should be about right,” a credit analyst with a local asset management company says.

However, the traffic volume projections may have failed to consider the effectiveness of the public transport system. While Malaysians are known to prefer driving cars, the government is spending about RM40 billion to upgrade infrastructure for public transport, ranging from buses, mass rapid transit and light rail transit.

With the billions to be spent on this sector, one cannot help but wonder if it will impact the toll road operators.  While acknowledging that public transport could be an alternative to expressways, the credit analyst adds that the authorities has envisioned Greater Kuala Lumpur needing at least 10 new highways in the near future — an indication that most KL folk will continue to choose to drive.

EKOVEST (8877) - A case of monetising future earnings