INVESTMENT HIGHLIGHTS

• 1HFY19 missed expectations

• Average weekday traffic subdued by a batch of public holidays

• Lower amortisation of HDE lifts earnings slightly

• Traffic volume to be sustained by subsidies for petrol

• Maintain BUY with revised TP of RM4.92 per share

1HFY19 missed expectations. Litrak reported 2QFY19 net profit of RM60.6m (+0.8%yoy) which contributed toward a cumulative 1HFY19 net profit of RM115.8m (+0.5%yoy). The results were below our estimates, accounting for 40% of full year forecasts but were in-line with consensus estimates at 46.2%. The earnings miss was mainly due to the +4.1%yoy and +4.9%yoy increase in staff and maintenance costs in 2QFY19 respectively.

A batch of public holidays impacted weekday traffic. We note that the revenue of RM132.2m in 1HFY19 was -1.8%yoy lower due to the lower traffic volume plying the LDP. There were a batch of public holidays in 2QFY19 such as; (i) Hari Raya Aidil Adha; (ii) Hari Merdeka; (iii) the four-day weekend in conjunction with the birthday of Yang di-Pertuan Agong and Awal Muharram; and also (iv) Hari Malaysia which was brought forward to a Monday. This further compounded the effect of the additional public holiday in connection with the GE14 in May 2018. Likewise, Sprint, could have seen a fall in traffic volume as it recorded a loss of RM1.6m in 1HFY19 (+6.0%yoy).

Lower amortisation of HDE lifted earnings slightly. Nevertheless, the drop in revenue was outweighed by the lower amortisation of highway development expenditure. Since FY17, LDP and Sprint amortises its HDE using forecasted traffic volume instead of revenue. The accounting practice is common for infrastructure assets.

Near term prospect. We believe that tollable traffic can be sustained by the influx of last mile delivery players in the wake of the e-commerce activities. With online mega sales being held epecially towards the end of the year, last mile delivery players will be faced by higher demand to deliver items especialy in the Klang Valley area which has a high possibility of passing by the Sistem Penyuraian Trafik KL Barat (SPRINT) and Lebuhraya Damansara-Puchong (LDP).

Long term outlook. Another catalyst that we foresee for LITRAK is the RON95 petrol subsidy for owners of cars with 1,500cc engines which was tabled during Budget 2019. Such initiatives could surpress the shift of people opting to commute by MRT and LRT and thus, limit the compression of traffic growth.

Earnings estimates. We are trimming our earnings forecasts for FY18 and FY19 by -16.2%. and -15.6% respectively. This after taking into consideration of the near term headwinds in 3QFY19 where tollable traffic might fall during the year end festive season in addition to the commencement of DUKE 2 in November 2017.

Maintain BUY with a revised TP of RM4.97 per share. Post earnings revision, our TP based on DCF method (WACC: 6.1%, Beta: 0.6) is revised down to RM4.97 (from: RM5.95). LITRAK is still a defensive play with decent dividends yield of 7.6% for FY20 while trading at a steep discount with a PER of 9.1x, -12.5 standard deviation below its 5-year historical PER of 14.5x. This translates to an earnings yield of 11.0%, implying an attractive spread of 7.12% against the latest 5-year Malaysian Government Securities yield of 3.88%.

Source: MIDF Research - 30 Nov 2018