INVESTMENT HIGHLIGHTS

• 12MFY17 missed expectations

• Average weekday traffic subdued

• Sprint adopts the unit of production method for amortisation

• Downgrade to NEUTRAL with revised TP of RM5.95

12MFY17 missed expectations. Litrak reported 4QFY17 net profit of RM52.7m (-4.1%yoy) which contributed toward a cumulative 12MFY17 net profit of RM224.1m (+28.7%yoy). The results were below ours and consensus estimates, accounting for 92% of full year forecasts. The earnings miss was mainly due to unexpected losses at associate Sprint, against our forecast of a profit.

Average weekday traffic subdued. We assess that the average weekday traffic for LDP highway could have fallen slightly in 4QFY17, by ~-0.4%yoy. Sprint, on the other hand could have seen a more drastic fall in average weekday traffic in 4QFY17 as it recorded one of its highest losses, contributing a -RM7.5m loss to Litrak. Sprint had been profitable since 4QFY15, and the recent hike in toll rates could have done more harm on traffic volume than expected.

Sprint adopts the unit of production method for amortisation. Similar to LDP, associate Sprint saw an uptick in its amortisation of its highway development expenditure (HDE). This follows an evaluation conducted by an independent consultant which resulted in higher traffic volume forecasts. Both LDP and Sprint now amortises its HDE using forecasted traffic volume instead of revenue, a practice which began in FY17. The accounting practice is common for infrastructure assets.

Downgrade to NEUTRAL with revised TP of RM5.95. We trim our earnings forecasts for FY18 and FY19 by -9%, reflecting higher amortisation charges and a lower traffic volume growth forecast. Consequently, our TP based on DCF method (WACC: 6.1%, Beta: 0.6) is revised down to RM5.95 (from: RM6.50). Due to limited upside, we downgrade the stock to NEUTRAL. However, LITRAK is still a defensive play with decent dividends yield of 4.6% for FY17 underpinned by free cash flow yield of 12%.

Source: MIDF Research - 31 May 2017