We initiate coverage on Perak Transit Berhad with an OUTPERFORM recommendation and a DCF-derived target price of RM0.36, potentially giving investors a 33% return with a reliable dividend yield of 3% (FY21E DPS: 0.84 sen*). We like Perak Transit Berhad (the Group) for: (i) its transformation in earnings profile towards a more recurring cash generative and high margin Integrated Public Transportation Terminal (IPTT) business model, (ii) its optimally geared balance sheet, with war chest of RM265m to comfortably fund the development of two upcoming new terminals, keeping growth momentum for the next 5 years, and (iii) it being a Covid-19 recovery play.

Recurring revenue with growth catalysts. Since the Group’s first IPTT in 2013, its earnings profile has been transforming from one that depended on bus operations and petrol retailing to one that is primarily driven by IPTT. We believe this bodes well for the Group as the IPTT segment: (i) generates defensive, recurring cash revenue, (ii) will generate growth from new terminals, digital advertising initiatives, and terminal management services, and (iii) will increasingly make up a larger portion of Perak Transit’s total revenue. All in, the recurring revenue of the growing IPTT segment and the growth catalysts make Perak Transit an attractive yielding asset with growth potential.

War chest of RM265m to continue growth momentum. With RM200m left to be drawn from its Sukuk, RM65m remaining warrant proceeds, and a highly cash generative IPTT segment, we are confident that the Group will be able to fund the development of Bidor Sentral and Terminal Tronoh (total GDC: c.RM300m) in FY21 and FY23, respectively. The two new IPTTs will provide continued growth momentum for the next 5 years.

A Covid-19 recovery play. 2020 has been challenging for the Group as a series of MCOs have adversely affected its bus and petrol stations operations. Of its 409,000 sf of gross leasable area, the recently opened Terminal Kampar Putra currently has a take-up rate of only 50%. We expect the woes of Covid-19 will gradually come to pass in 2021, ringing in a return in consumer spending that could expedite Terminal Kampar’s take-up rate to up to 70%. The economic re-opening and resumption of the normal pace of business in Malaysia would aid the recovery of its bus and petrol station operations (constituting 44% of total revenue as of 3QFY20).

Forecast FY20E and FY21E CNP of RM39.4m and RM46.8m, respectively, representing growth of -1% and +19%, respectively. We believe that the higher margins that the group has achieved are largely thanks to the growing IPTT segment, which will minimize the pandemic’s impact on its FY20E CNP. In FY21, we expect a +19% growth in revenue (FY20E: RM113.4m; FY21E: RM134.7) but softer PBT margins on higher interest charges as we expect the Group to drawdown on the Sukuk to fund Bidor Sentral’s construction.

Initiate with OUTPERFORM and Target Price of RM0.36, based on a 6- year DCF valuation with WACC of 7.7% and a terminal growth rate of 2%.

Key risks include: (i) high dependency on two advertising and promotional (A&P) clients; (ii) faster-than-expected loss of income from project facilitation fees, and (iii) lower-than-expected take-up rates and footfall in Terminal Kampar Putra.

Source: Kenanga Research - 20 Nov 2020