News

• Toll rate hike for most highways. Various media sources have reported that effective this Thursday (15 Oct), toll rates on most major highways will be hiked (see Figure #1).

Comments

• Hike after a long stagnation. The toll rate hike comes after a long stagnation as there have been no increases in the past 7 years. Last year, it was reported that the Government paid RM559m in compensation to toll concessionaries as a result of the actual toll rates being lower than the stipulated rates in their respective concession agreements (CA).
• Transferring the burden but minimal impact on concessionaires. The toll rate hike is expected to have minimal earnings impact for most concessionaires. This is because most concessionai res were already receiving thei r stipulated rates as per their CA via compensation from the Government (i.e. the di fference between the CA rate and the lower actual rate was subsidised). In essence, the hike merely transfers the burden of the toll which was previously shared between motorists and the Government solely to the motorist. Cash flows of concessionaries will nonetheless be eased as they no longer have to wait for compensation to be paid.
• Traffic volume may suffer. Whilst concessionaires will still be effectively receiving their CA rate post hike, traffic volume is likely to suffer as motorists will now be paying more with the subsidy removed. Based on the experience from past hikes, our simple back of the envelop calculation suggests that every 10% toll rate increase would result to a 1% drop in traffic volume. However, given that the hike this time around is more widespread (i.e. previous hikes were very highway specific), the price elasticity of motorists could be higher.

Stock Impact

• Minimal impact to valuation. Contractors under our coverage that have stakes in the impacted tolls are Gamuda and IJM. Our DCF valuation on thei r tolls assumes that the rate hike takes place as per their respective CAs (not when it actually happens). As such, this actual hike does not alter our valuation as it has already been factored in.
• Gamuda (BUY, TP: RM5.01) holds a 45.5% stake in Litark (non-rated) which is the concessionaire of the LDP. It also holds a 50% stake in the SMART Tunnel. Litrak makes up 9% of our SOP based TP of RM5.01 while SMART forms an insignificant 1%.
• IJM (BUY, TP: RM3.92) wholly owns the NPE and Besraya as well as a 50% stake in LEKAS. Collectively, these 3 tolls make up 12% of our SOP based TP of RM3.92.
• Other listed concessionai res which announced toll rate hikes are SILK, Ekovest,Bina Puri, MMC and Litrak.

Source: Hong Leong Investment Bank Research - 13 Oct 2015