Monday, August 24, 2009

This Doesn't Sound Right



Read this over the weekend in The Star. Was flabbergasted. The audacity to even think of such a move. Considering the feelings of the general public, this is a pretty silly proposal. My views after the article.
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RM26bil bonds poser on takeover of toll concessions.

LITTLE known Asas Serba Sdn Bhd claims it had submitted a proposal in May to seek approval from the Government to take over all the toll concessionaire companies in the country. That’s 22 toll concessionaires in the country with the cream of the crop being PLUS Expressways Bhd, which is in the UEM Group Bhd stable. It is a clever plan to take over all the highways and their pledge is that they will bring down toll rates by 20% and maintain that rate level for the remaining of the concession period.

But the proposal raises questions – how will it fund the acquisition, has it taken into consideration the RM26bil worth of bonds that have been issued by all the toll concession companies, and what would it offer as a solution to bottlenecks on urban highways?

At this point there are more questions than answers and many wonder why Asas has come up with a plan when the Government also has plans to take PLUS private. Is there a correlation or is this a mere opportunity to buy the assets? Of course the Government and PLUS have denied seeing any proposal from any party. Not many analysts are convinced that it will be easy for Asas to take over all the assets.

It was reported yesterday that Asas, a special purpose vehicle, had submitted a plan to the government, presumably the Finance Ministry, to take over all the toll concessions in the country. It was reported that Asas was represented by Datuk Syed Md Amin Aljeffri, chairman of the Kuala Lumpur Malay Chamber of Commerce (KLMCC), Ibrahim Bidin, the president and chief executive officer of Pinelabs (M) Sdn Bhd and former chief operating officer of PLUS, Wan Kamaruddin Wan Mohamed Ali, a former director of Babcock and Brown and Fieldstone International, and Syed Budriz Putra, chief executive officer of Sepang Aircraft Engineering Sdn Bhd.

Calls to Syed Md Amin went unanswered.

The Government, according to Minister in the Prime Minister’s Department Tan Sri Nor Mohamed Yakcop, who also heads the Economic Planning Unit, is looking for the best option to take PLUS private. He said the proposal was in its final stages before it was submitted to the Cabinet. The Government, via its investment agency Khazanah Nasional Bhd, has a 63.87% stake in PLUS, which is said to be worth RM10.5bil at current market value.

Besides that, another 22% of PLUS is held by other Government institutions such as the Employees Provident Fund, PNB/Amanah Saham, which means the government controls 84% of PLUS currently. If the Government is set to take PLUS private, will it consider Asas’ proposal? The Government has to fork out an estimated RM7.7bil if it were to buy the remaining shares in PLUS it does not own.

This is based on PLUS’ closing price yesterday of RM3.32 a share, plus a 30% premium for 1.8 billion shares from the non Khazanah block. That is a lot of money to fork out to buy assets that do not create new jobs nor has any multiplier effects on the Malaysian economy unlike the building of new highways. Those funds could be used to build alternative routes for some of the choked intra-urban highways.

About 10% of the current shareholders of PLUS are foreigners and that means billions of ringgit will flow out of the country if Malaysia’s biggest toll operator is taken private. If there is indeed a proposal from Asas to take over all the highways, then there may also be pressure on the Government to do the same for other companies. All this is going to cost the Government billions, perhaps it would be more cost effective to have a bullet train criss-crossing the country than buying up highways as the bullet train will create more economic activity.

An expert noted that “if the Government takes over PLUS then it can forget about the handsome dividends it gets and all the revenue from toll collection would be used for debt repayment and operations and maintenance of the highway.” The expert believes that instead of the Government buying up highways, it should instead be looking at reviewing and capping toll rates, as well as revisiting the agreements made with the road toll operators. The Government should also look at finding alternative routes to ease congestion, the expert said.

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My views:

a) taking toll roads private should not be encouraged, in particular when PLUS is about the biggest toll road company in Asia, it is a significant and interesting vehicle to foreign funds, it adds to the allure of listed Malaysian stocks ... you don't want to keep taking interesting stocks off the table, first Maxis, now PLUS, what next??? YTL, IOI, Commerce???

b) how can you privatise 22 toll roads and ensure a 20% drop in toll charges ... are you saying you can maintain the same charges forever, of course not, you will have to raise toll rates sometime again in the future, and thats when the public sentiment will come back to bite the government, ... do not create the situation where so many are going to be so pissed off by so few.

c) the only way I can privatise 22 toll roads, drop tolls by 20% and not raise them for 5 years is if I get to privatise these toll operators VERY CHEAPLY, i.e. below market prices.. hell if the purchase price is low enough, I may be buying PLUS that will be yielding me 20% now... of course no need to raise rates then, can even lower them, but that is not an equitable proposal for shareholders, and the only way it will happen is if the government forces its hand and sell cheaply = the public selling these assets cheaply to the few.

d) if the government is really wanting to deal effectively with tolls and pacify the public, then get EPF to privatise, at least it will be owned by the public, and EPF always complaining of not enough decent assets to invest in, this can generate stable dividends, even if you have to raise rates, ppl won't be so mad as it flows back to them via EPF, EPF should target an anual return via dividend of 6%-8%, if it can get that, no toll rate hike, easy peasy...

e) just do the math for PLUS, it has a market cap of RM16.6bn and net profits for first half was RM509m (annualised RM1.018bn). To get a 6% rate of return, net profits need to be RM996m, so taking that line of logic, EPF can take this on, particularly since their debt mgmt exercise dragged down profits a bit which will rework itself to higher profits in future interims. On 16 sen DPS, it it giving a net yield of 4.9%, assume no growth in toll rates after EPF privatisation, the dividend yield will move much higher just on organic traffic growth. Operating cash flow is already past RM1bn, so EPF can and should take this on - isn't it wonderful if EPF takes it over and gives a guideline to PLUS that if they give EPF an annual net dividend of 6%-8%, there will be no toll rate hikes - I think the general public will celebrate this. ... On the same logic, how the new vehicle can drop rates by 20% is beyond me, who will fund such a thing when its netting around 3% for PLUS a year??? Surely they will have hike rates up significantly sometime in the future, and the government will have to come in and guarantee the RM26bn. If the deal is palatable, just do it via local and foreign banks and see if they bite with no guarantee, if they do, then by all means go ahead.

f) IF and its a big IF, IF you can drop toll rates by 20% like what Asas Serba is saying, by taking them private... ALL THE MORE REASON THIS DEAL SHOULD BE DONE BY EPF and not just by a few individuals.



p/s photo: Ziana Zain

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