According to news reports, Tun M has confirmed earlier media reports that the government will not be selling PLUS to the private sector. The Prime Minister also indicated toll rates would be cut by 18% by extending the outstanding concession period by a period of 20 years. This news bodes well for Edgenta as there were previous concerns that PROPEL (100% owned) might lose its role as the maintenance contractor for the NSE. Maintain BUY on Edgenta with TP of RM3.56. A sale of the four tolled highways (LDP, KESAS, SMART and SPRINT) looks increasingly likely as it does not contradicts the government's policy on tolled highways.

NEWSBREAK

Status quo. According to news reports, PM Tun M has confirmed earlier media reports that the government will not be selling PLUS to the private sector. The decision was made after considering all proposals from the private sector. The Prime Minister also indicated toll rates would be cut by 18% by extending the outstanding concession period by 20 years.

HLIB’s VIEW

Recap. In total 4 unsuccessful bids for PLUS were tabled to the government. They comprise of bids from Tan Sri Halim Saad (100% equity stake for RM5.2b), Widad Group (RM5.3b cash offer translates to enterprise value offer of RM38.4b), RRJ (100% equity for RM3.5b) and Tan Sri Abu Sahid Mohamed (enterprise value offer of RM34.9b).

Potential complications from selling. We reckon a transaction involving a sale to the private sector may lead to complications with regards to obtaining bondholders approval. As we understand, PLUS’s sukuk is currently rated by MARC as AAA (highest rating) in part we think due to its government ownership. In our view, a shift of ownership to the private sector would have inevitably met opposition from the bondholders due to heightened credit risks. Such a scenario would have required compensation paid to the bondholders to facilitate the sale. Consequently, plans to reduce toll rates by a minimum of 18% may be derailed.

UEM Edgenta. This news bodes well for Edgenta as there were previous concerns that PROPEL (100% owned) might lose its role as the maintenance contractor for the NSE. Furthermore, with the extension of the concession period by 20 years, the company’s tenure as maintenance contractor for NSE may possibly be further extended. Maintain BUY on Edgenta with TP of RM3.56.

Remaining toll roads. There was no mention for the fortunes of 4 toll roads (LDP, KESAS, SMART & SPRINT) undergoing an acquisition attempt by the government. However, a sale of the four tolled highways looks increasingly likely as it does not contradicts the government's policy on tolled highways, as evident by the non-sale of PLUS. Based on details from the proposed transaction, Litrak’s (NR) fair value amounts to RM5.21 representing a 10.6% upside from current price.

Source: Hong Leong Investment Bank Research - 17 Jan 2020