INVESTMENT HIGHLIGHTS

• GoM started negotiations with Gamuda to acquire highway concessions

• Future acquisitions likely to be done in phases

• Earnings forecast unchanged pending further details

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

GoM plans to acquire highway concessions. According to a press statement on 23 February 2019, the Government of Malaysia (GoM) has commenced talks with Gamuda Berhad to negotiate the acquisition of the highway concession in which the company has a majority stake in which includes SPRINT (52%) and LDP (44%) which is under LITRAK. Upon successful takeover of the highway concession, the GoM will plans to abolish the existing toll mechanism.

Possible scenario. With the possible acquisition of SPRINT and LDP by the government, we opine that it will be done in phases. This is in consideration of the cost required, coupled with the government’s priority to rein in its finances. On the same token, we understand that the government intend to compensate concessionaires based on the rate stated in the contract that is the construction cost (exclusive of future profit).

Our view. Similar to our view with Gamuda Berhad, we consider the news as a surprise, as it was initially announced by government, that scrapping of tolls nationwide would be deferred until fiscal conditions permit. While we initially aware of the possible takeovers, we think that the move comes sooner than expected. On that note, we believe the news will elevate uncertainties on LITRAK, which we expect will put investors on tenterhooks with overtone of caution.

Earnings impact. We reckon that the impact to LITRAK’s earnings is net negative, as the move will result in earnings vacuum. However, we opine that it is too early to ascertain the impact, as we are lacking details. On that account, our forecasts on the group earnings remain unchanged until further development on the acquisitions and its upcoming 3QFY19 results.

Maintain BUY with an unchanged TP of RM4.92 per share. Our TP based on DCF method (WACC: 6.1%, Beta: 0.6). LITRAK is still a defensive play with decent dividends yield of 7.3% for FY20 while trading at a steep discount with a PER of 10.6x, which is below its 5-year historical PER of 14.2x. This translates to an earnings yield of 9.4%, implying an attractive spread of 6.7% against the latest 5-year Malaysian Government Securities yield of 3.79%. However, we do not discount the possibility of an earnings downgrade as details of the planned acquisition of highway concessions get clearer.

Source: MIDF Research - 25 Feb 2019