Investment Highlights

• We increase our FY21-23F earnings and increase our fair value (FV) to RM1.09 for Perak Transit based on 15x its fullydiluted FY22F EPS (with no ESG adjustment based on its 3- star rating), 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. Maintain BUY.

• Perak Transit’s 9MFY21 core net profit of RM40.5mil came in above our expectation at 82% of our full-year forecast, but within the consensus full-year estimates at 79%. We believe the key variance came largely from better-than-expected performance from its integrated public transport terminal (IPTT) operations, which has recorded a surge in revenue by 50% YoY despite of the prolonged lockdown domestically, thanks to the new advertising income stream from Kampar Putra Sentral, as well as a higher recognition of the project facilitation fees. We have reflected these in our revised earnings forecasts.

• Perak Transit’s 9MFY21 turnover improved by 26% YoY, mainly due to higher contribution from its IPTT operations. The group’s core net profit surged by a higher 42% thanks to cost containment efforts and lower finance cost.

• Perak Transit’s IPTT operations segment recorded a strong 50% YoY increase in revenue for 9MFY21, backed by the new advertising income stream from Kampar Putra Sentral which was opened in September 2020, as well as new rental income from the logistics and/or warehousing and distribution tenants for both Terminal Meru Raya and Kampar Putra Sentral beginning September 2021.

• The rental income from the logistics tenants ranges between RM2.5mil - RM3.0mil per month, with more potential upside moving forward, stemming from the growth of the tenants under revenue sharing model. It has also recorded a higher recognition of project facilitation fees of RM39.0mil for the period, vs. RM26.0mil from a year ago.

• Meanwhile, revenue from petrol station operations contracted by 6% YoY on lower sales. Likewise, bus operation’s revenue decline by 8% YoY dragged by the longer movement restrictions enforced during the period as compared to a year ago.

• 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. The company targets to secure additional three to four contracts in FY22.

• We gather that the construction for Bidor Sentral has commenced and remains on track. The revenue contribution from Bidor Sentral is expected to kick in in 2HFY23. Perak Transit has issued a second tranche Sukuk Murabahah of RM100mil to finance the preliminary costs and construction costs for the terminal, as well as for other working capital requirement.

• Over the mid to long term, we believe the growth drivers for Perak Transit 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 60% and the tenants enjoy free-rental amidst the MCO); (iii) anticipated Bidor Sentral’s revenue contribution from 2HFY23. We also gather that Perak Transit will not be affected by the Prosperity Tax as subsidiaries within Perak Transit will not generate FY22F earnings exceeding the RM100mil taxable income benchmark.

• 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 9–10x 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 - 17 Nov 2021