Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM2.20 based on 10x CY19F FD EPS of 22.0 sen, in line with our benchmark forward target P/E of 10x for large-cap construction stocks.

• The government over the weekend announced that it had commenced talks with Gamuda for the acquisition of Lebuhraya Damansara Puchong (LDP), Sistem Penyuraian Trafik KL Barat (Sprint), Lebuhraya Shah Alam (Kesas) and Smart Tunnel.

• Gamuda’s stakes in the above toll roads are as follows: 1. An effective 43.6% stake in LDP via its 43.6% stake in Lingkaran Trans Kota Holdings Bhd (Litrak) (LDP is wholly-owned by Litrak); 2. An effective stake of 51.8% in Sprint by virtue of: (i) a 30% direct stake; and (ii) a 21.8% indirect stake via Litrak, which owns a 50% stake in Sprint; 3. A 70% direct stake in Kesas; and 4. A 50% direct stake in Smart Tunnel.

• Upon the successful takeover of the toll roads, the government intends to abolish the existing toll mechanism, and replace it with a “congestion charge” which will go towards the operations and maintenance of the highways and repayment of borrowings (which means the exercise does not entail a restructuring of the bonds issued by the highway concessionaires).

• For the six hours during the “peak” period of the day (yet to be defined), toll road users will pay a congestion charge equivalent to the existing toll. For the 12 hours of the “normal” period during the day, defined as other than: (1) the “peak” period; and (2) the “off-peak” period (defined as between 11pm and 5am), road users will pay a reduced congestion charge equivalent to a 30% discount to the existing toll. For, the “off-peak” period, the highways are toll-free.

• We believe under the new structure, road users will enjoy some savings, while the highways will still be able to continue to fund their operation and maintenance as well as service their debt obligation. The government will effectively take over the equities, and hence take back the concessions of these highways (There is no change to ownership as the government is always the owner of these toll roads under the build, operate and transfer (BOT) model).

Source: AmInvest Research - 25 Feb 2019