Investment Highlights

• We maintain our BUY call and forecasts, but tweak our fair value (FV) up by 3% to RM1.08 (from RM1.05) to reflect an upgrade in its ESG rating as appraised by us (Exhibit 5) to 3 stars (from 2 stars). Our FV is based on 15x its fully-diluted FY22F EPS (with no ESG adjustment based on its 3-star rating, vs. a 3% discount based on its 2-star rating previously), at a 30% discount to our FY22F target PE of 22x for Malaysia Airports.

• We use Malaysia Airport as the valuation benchmark for Perak Transit as we see many similarities between this operator of modern public transport terminals and an airport operator.

• Perak Transit’s 1HFY21 net profit came in within expectations at 55% of our full-year forecast and 53% of the full-year consensus estimates respectively.

• Its 1HFY21 turnover improved by 43% YoY, mainly due to higher contribution from its integrated public transport terminal (IPTT) operations. The group’s net profit surged by a higher 61% thanks to cost containment efforts and lower finance cost.

• For 1HFY21, Perak Transit’s IPTT operations segment recorded a strong 82% YoY increase in revenue, backed by the new advertising income stream from Kampar Putra Sentral which was opened in September 2020, as well as higher recognition of project facilitation fees.

• Meanwhile, revenue from petrol station operations improved by 4% YoY on the higher fuel price in 1HFY21. On the other hand, bus operations recorded a 3% YoY decline in revenue amidst movement restrictions.
   
• Key Takeaways From Its Analysts Briefing Yesterday Are:

1. The company is confident that it will keep up its strong performance in 1HFY21 for the rest of the year despite the prolonged MCO, mainly underpinned by: (i) the locked-in incomes from the IPTT segment, particularly the advertising incomes and project facilitation fees (both combined typically contribute to more than 95% of revenues from the terminals); and (ii) rental revenues from idle areas in the terminals to be leased out as a logistics hub from 2HFY21.
2. Over the mid to long term, its growth drivers will come from: (i) higher rental rates for its terminals upon the resumption of footfall post-pandemic; (ii) a higher contribution from Kampar Putra Sentral, stemming from the expiry of the free-rental period and a higher occupancy rate (to recap, the occupancy rate of Kampar Putra Sentral’s commercial area currently stands at about 50% and the tenants enjoy free-rental amidst the MCO); (iii) anticipated Bidor Sentral’s revenue contribution from 2HFY2
3. Meanwhile, construction on Bidor Sentral is slated to begin within the next two months. 3. For terminal management contracts (TMC), Perak Transit continues to talk to third-party bus terminals for potential new projects/contracts although the discussions have somewhat been delayed due to the MCO. As for the existing contracts, Terminal Bas Shahab Perdana remains on track to commence operation by April 2022 while revenue from Terminal Sentral Kuantan is stable as the terminal management fees are paid annually on a contract basis.
4. Perak Transit has made significant progress in its plan to transform the idle areas in its existing terminals into a logistics hub. Currently, it is in talks with two potential tenants (comprises third-party logistics and/or warehousing and distribution players) and hopes to close deals within the next two months. Perak Transit has earmarked 10–30% of the area in the terminals to be leased out as a logistics hub. The company believes this will help to maximise the lettable area, footfall and hence revenues in its IPTT operations.

• We Continue to Like Perak Transit for:

1. Its unique business model, i.e. the operation of modern public transport terminals that emulate airports with spacious and brightly lit shopping, dining and waiting areas, and clean public facilities particularly the washrooms. These entice visitors to spend more money and time in the terminal prior to their departure or upon their arrival, or while sending off or picking up their loved ones. This captive traffic is monetized in the form of rental incomes from commercial units and advertising space within the terminal;
2. It having proven the commercial viability of this business model in its Terminal Meru Raya in Ipoh (an interstate transportation hub) and the newly opened Kampar Putra Sentral. Kampar Putra Sentral is also buoyed by a high and fast-growing student population in the campus town of Kampar. This student population has high propensity to travel during school breaks and festivities, as well as during weekends for leisure; and
3. The vast opportunities to replicate this successful business model. Already, it has at least three more projects in the pipeline, namely, in Bidor, Tronoh and Alor Setar.

• At 7–8x forward earnings, we believe Perak Transit offers investors a good opportunity to own a defensive public infrastructure business that is replicable for growth at bargain valuations.

Source: AmInvest Research - 20 Aug 2021