Uncertain Times Ahead

Perak Transit’s (PT) 1Q18 earnings were below expectations. Pre-tax profit fell 32% yoy to RM5.7m on the back of reduced project facilitation fees and lower operating margins. While its core businesses remained operationally sound overall, we are concerned with potential setbacks on its businesses due to the recently announced dissolution of SPAD. We cut our 2018-20E EPS forecasts by -42%/-33%/-27% to reflect higher earnings risk as well as margin contraction. Post-revision, we roll forward our valuation horizon to 2019E with a lower DCF derived TP of RM0.26.

1Q18 Results Below Expectations

PT’s 1Q18 revenue was down 2.6% yoy to RM26.1m, mainly on the back of lower billed project facilitation fees which are highly uneven in nature. Operating margins also contracted sharply (-7.5ppt yoy), primarily due to sensitivity to the fees’ lofty margins. Subsequently, pre-tax profit was down 32.1% yoy, accounting for only 17% of our and consensus’ 2018 estimates. However, net profit rose by 38.3% to RM8.5m, but was driven by higher tax allowances utilised this quarter.

Operationally Sound, for Now

While PT’s ex-fees revenue from its integrated terminal, petrol station and bus operations continued to grow in 1Q18 (+6.1% yoy, +3.0% qoq), we have turned cautious over the announced dissolution of the Land Public Transport Department (SPAD), whose duties will be taken over by the Transport Ministry. Given SPAD’s heavy influence on PT’s operations, this could present considerable uncertainty on both its existing bus and terminal operations, as well as its terminal expansion plans in Kampar, Bidoh and Tronoh. (This note marks a transfer of analyst coverage).

Downgrade to HOLD

We cut 2018-20E earnings by -42%/-33%/27% respectively to reflect margin contractions as well as heightened operational risks posed by the transition in regulatory body, which could potentially affect most of Perak Transit’s current and aspirational businesses. We downgrade the stock to a HOLD with a substantially reduced DCF-derived TP of RM0.26.

Source: Affin Hwang Research - 25 May 2018