Perak Transit has secured their first terminal management services (TMS) contract, to co-manage Terminal Sentral Kuantan with Energetic Point Sdn Bhd. With RM1.2m in first year revenue and 3% annual increment for nine years, the contract is a good start to its TMS initiative. While this contract contributes less than 2% to our FY21E CNP, we expect four to five more TMS contracts in FY21. We increase FY21E CNP by 2% to RM47.8m and maintain FY20E CNP of RM39.4m. Reiterate OUTPERFORM with unchanged DCF-driven TP of RM1.08. Current price of RM0.82 implies Fwd PER of 11x, below its 4-year mean of 15x PER. FY21E DPS of 2.5 sen implies 3% yield.

Promising start to TMS. The maiden TMS contract to co-manage Terminal Sentral Kuantan (TSK) with Energetic Point Sdh Bhd (EPSB) is a promising start to its TMS initiative. EPSB will pay the Group RM1.2m in the first year with 3% annual increment for nine years (1 Feb 2021 – 31 Jan 2030). The Group’s initial investment of RM3.05m will be capitalized and depreciated over the period. We view the contract as a positive for the Group with: (i) payback period of less than three years, (ii) PBT margins of 65% to 75%, and (iii) PAT margin of over 60%. Furthermore, because the renovation works have already been carried out by EPSB, the Group will start receiving its first cash payment of RM100K in February 2021.

TMS: Low capex, high earnings visibility, recurring income stream. We view TMS as a profitable and stable new revenue stream. By managing third party terminals, the Group incurs minimal capex (mostly single-digit million) as compared to building their own IPTT with GDCs in excess of RM100m. Moreover, as the Group continues adding new layers of earnings from new TMS contracts, the previously secured contracts will already be contributing and growing. The TSK contract is a step in the right direction for the Group to achieve a recurring and cash-generative earnings profile.

Many more contracts to come. While the TSK contract contributes less than 2% to our FY21E CNP of RM47.8m, this is the first of several TMS contracts to be secured. TSK is one of the 90 odd IPTTs and bus terminals in West Malaysia alone. As the only listed company in the bus services and terminal management business, the Group faces little competition in managing third party terminals. Terminal Meru Raya has recently been awarded “Grade A” terminal status (1 of only 2 IPTTs in Malaysia), which is a testament to the management’s experience and capability. We are confident that the Group can secure another four to five TMS contracts in FY21 and more beyond that.

After speaking with management, we have better visibility on potential contracts for FY21; hence, we increase FY21E CNP marginally by 2% from RM46.8m to RM47.8m, and maintain FY20E CNP of RM39.4m.

Reiterate OUTPERFORM and DCF-driven TP of RM1.08 (postconsolidation). We maintain our DCF assumptions (WACC: 7.7%; TG: 2%). The current share price of RM0.82 implies a forward PER of 11x, which is below its 4-year average of 15x PER. Our FY21E DPS remains intact at 2.5 sen, implying a dividend yield of 3%.

Risks to our call 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 - 18 Jan 2021