We think the proposal put forth by Gamuda to have their four tolled highways acquired by a highway trust for RM5.2b through monies raised from bond issuances is a good idea which would benefit (i) Gamuda, (ii) the Federal Government, and (iii) to a lesser extent the businesses and citizens concentrated in KL and Selangor. By undertaking this proposal, we see the government being the greatest beneficiary as they get to save on toll compensations worth RM5.3b over the toll concessions’ remaining tenures while also indirectly help Gamuda raise PFI (private funding initiative) equity to jump start the intended MRT3 project. This means less fiscal burden while stimulating the economy at the same time. We also think that this new proposal is better than the 2019 model proposed which required the government to be a guarantor and suggested a congestion charge model (i.e. 30% lower toll rates) which could be disruptive towards traffic flow on competing highways/public transport. Keep OP and RM4.17 TP for Gamuda and maintain Overweight on the sector. Highway trust to take over Gamuda’s tolled highways. According to details revealed by The Star and The Edge over the weekend, Gamuda has put forward a proposal to the government to sell four of their highway concessions to a trust known as Amanah Lebuhraya S/B. This trust will fund the acquisitions by raising monies from bond investors with a promised annual return of 4-5% backed by cash flows from the tolls without any need for government guarantees.

Tentative price tag of RM5.2b for the four tolled highways. These four highways’ enterprise value (EV) is estimated to be RM5.2b, lower than the RM6.2b valuation accorded in 2019 after accounting for two years of less cash flows – in line with our estimates. Dissecting the RM5.2b EV valuation, we estimate the four highways having an equity value of RM3.7b with remaining debt of RM1.5b (refer table below). Consequently, Gamuda’s effective equity stake would be valued at c.RM1.9b – of which they would record a gain of c.RM0.7b based on their FY20 effective net asset value of RM1.2b for the highways.

Longer concession period for no toll hikes. In exchange for no toll hikes moving forward, the concessions would be extended by tentatively 5 years with an option of another 2-3 years’ extension to cover any deficits to repay the trust bonds.

Our thoughts. If the government intends to continue freezing toll hikes, we think this highway trust proposal could be the best way forward, instead of opting for a compensation method given their weak fiscal position. We believe this deal would greatly benefit: (i) Gamuda, (ii) the Federal Government, (iii) and to a lesser extent the businesses and citizens concentrated in KL and Selangor.

Lump sum cash can be used for MRT3. The upfront cash obtained by Gamuda can be invested into other new growth areas, while at the same time liberate them from policy, traffic and regulatory risks. Given the government’s recent intention to have more private funding initiatives (PFI) for public projects such as the MRT3, we think such lump sum cash would be ideal for Gamuda to help jump start this initiative – indirectly also benefitting the government by alleviating their cash flow burdens for this mega project. Should such sale go through, Gamuda’s net gearing position would improve to 0.06x (from 0.28x as of Jan 2021). Meanwhile, the government would also save on c.RM5.3b of toll compensations (from the toll hike freeze) for the remaining concession period for the tolls. As for the businesses and citizens in KL and Selangor, while they get to enjoy zero toll hikes, though they will have to pay tolls for a longer tenure – hence we are only mildly positive from their perspective.

Better alternative than the 2019 model. Unlike the 2019 model which requires the government to acquire the tolls and be the ultimate guarantor, we believe this proposal is much better for the government’s books as it is risk-free for them. Also, the previous 2019 model also suggested a congestion charge which would (i) reduce toll rates by 30% during non-peak hours and (ii) free travel during off peak hours. This could be disruptive to traffic flows on competing highways/existing public transport – causing imbalance to the traffic network. Lastly, should this proposal go through, this opens the doors for other existing toll concessionaires to sell their matured highways (provided attractive terms are offered to bond investors) to channel the proceeds for new areas of growth – should there be opportunities.

Source: Kenanga Research - 10 May 2021