INVESTMENT HIGHLIGHTS

• 9MFY19 within expectations

• Average weekday traffic subdued by a batch of public holidays

• Lower finance costs lifts earnings slightly

• Risk of highway concession to be disposed at a discount to book value

• Downgrade to NEUTRAL with revised TP of RM4.08 per share

9MFY19 met expectations. Litrak reported 3QFY19 net profit of RM61.2m (+0.7%yoy) which contributed toward a cumulative 9MFY19 net profit of RM177.0m (+0.5%yoy). The results met our estimates, accounting for 75.0% of our and consensus’ full year forecasts,

A batch of public holidays impacted weekday traffic. We note that the revenue of RM389.6m in 9MFY19 was -1.6%yoy lower due to the lower traffic volume plying the LDP. There were a batch of public holidays in 4QCY18 such as; (i) Maulidur Rasul, (ii) Deepavali and (iii) Christmas. This further compounded the effect of the additional public holiday in connection with the GE14 in May 2018 during the nine month period.

Lower amortisation of HDE lifted earnings slightly. Nevertheless, the drop in revenue was outweighed by the lower amortisation of highway development expenditure for 9MFY19. Since FY17, LDP and Sprint amortises its highway development expenditure (HDE) using forecasted traffic volume instead of revenue. The accounting practice is common for infrastructure assets. Apart from that, earnings were lifted by the -17.7%yoy drop in finance costs during the period under review pursuant to repayment of borrowings in April 2018.

Outlook. The prospects for LITRAK have become uncertain following the announcement that the Government has started negotiations with Gamuda to acquire four highway concessions that Gamuda has majority stake in. Amongst these four are SPRINT and LDP (100% owned by LITRAK) which Gamuda has a 52% and 43.6% effective stake respectively. The exercise is expected to take six months which hopefully could be concluded at a reasonable pricing for the parties involved. Meanwhile, it is possible that the concession assets could be valued based on DCF methodology which takes into account of future cash flows.

Possible scenarios for LITRAK under the Government’s plan to takeover highway concessions would be the acquiring GAMUDA’s stake in the respective highway concessions to be followed by a purchase in the remaining stakes of LITRAK. Based on past events where Gamuda’s water concession asset, SPLASH, was sold at a steep discount of more than 20% of its book value at RM2.55b. This poses a downside risk for LITRAK, as the highway concession asset could be acquired at a similar discount to its book value. Currently, LITRAK traded at PBV of 2.3x with a BVPS of RM1.80 as of 31 December 2018

Earnings estimates. We are maintaining our earnings estimates as the results came in line with our expectations.

Downgrade to NEUTRAL with a revised TP of RM4.08 per share. We are revising our TP downwards to RM4.08 per share (previously RM4.92 per share) as we ascribe a higher WACC of 7.25% in our DCF valuation to reflect the uncertainty surrounding highway concessions including LDP and SPRINT. Nonetheless LITRAK is still deemed a defensive play with decent dividends yield of 7.1% for FY20 while trading at a PER of 9.6x, which translates to an earnings yield of 10.4%, implying an attractive spread of 6.7% against the latest 5-year Malaysian Government Securities yield of 3.7%. Rerating catalyst would be from a reasonable offer by the government if it takes over the whole concession of LDP and LITRAK.

Source: MIDF Research - 28 Feb 2019