INVESTMENT HIGHLIGHTS

• MOF Inc offers RM2.75b to acquire LDP and SPRINT

• Acquisition of highways to result in RM5.3b worth of saving for tax payers

• Opportunity to realize at an attractive premium above 20% with respect to our target price and latest closing price.

• Recommending shareholders to accept the offer

MOF Inc offers RM2.75b to acquire LDP and SPRINT. LITRAK on 21 June 2019 received a Letter of Offer from the Ministry of Finance Incorporated (MOF Inc) in respect to acquire all securities of Lingkaran Trans Kota Sdn Bhd (which is the concession holder of Lebuhraya Damansara Puchong (LDP)) for an enterprise value (EV) of RM2.47b, and its 50% associate, Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd (SPRINT) for an EV of RM1.98b. LITRAK anticipates that the equity values for its highway concessions (premised on the aforesaid enterprise value and indebted as at completion combined with normal operating conditions including the receipt of all receivables due under the concession agreements) to be:

Rationale of acquisition. The acquisition of the two highways in addition to KESAS and SMART will prevent compensations of more than RM5.30b due to the freezing of the toll rate hikes. Under the new congestion charge system that was previously announced, commuters using these four highways will save as much as RM180 million per annum.

Valuation wise. From a shareholder’s perspective, we believe that the offer is appealing. The combined price tag of RM2.75b for both highway concessions translates to an effective offer price of RM5.21 per share with a P/BV of 2.96x, a 24% premium to the 12-month trailing P/BV of 2.39x. Moreover, the anticipated offer price of RM5.21 per share constitutes a 28.0% premium to our target price of RM4.08 per share derived from discounted cash flow valuation.

Outlook for LITRAK. The average weekday tollable traffic volume plying through LDP and SPRINT has been on the downtrend since FY15 following the toll hike in October 2015. We expect growth in traffic volume to remain muted as the ridership of public transportation such especially LRT (Star and Putra), KTM Commuters and KVMRT Line 1 has been on an upward trajectory. Moreover, the introduction of the unlimited monthly pass called My100 and My50 will further encourage the use of public transportation in the near term. On a longer term, the completion of KVMRT Line 2 in 2022 which connects Sungai Buloh, Serdang and Putrajaya combined with the possibility of KVMRT Line 3 to be reinstated will exacerbate the risk downside risk on tollable traffic volume. Specifically for SPRINT, the Damansara Link runs parallel to the stretch of KVMRT Line 1 from Semantan Station to Taman Tun Dr. Ismail station and we opine that the impact towards traffic volume will be more pronounced with the continuous improvement in public amenities and connectivity. Of the four stations competing directly with Damansara Link, Phileo Damansara and Pusat Damansara Station are equipped with park and ride facilities with over 500 car parking bays.

Upgrade to TRADING BUY with a revised TP of RM5.21 per share. Due to the attractive upside from the current price and our valuation, we advise investors to accept the offer as an exit strategy amidst the lack of catalyst LDP and SPRINT As such, we upgrade our call on LITRAK from NEUTRAL to TRADING BUY with a target price of RM5.21 per share, reflecting the offer price by MOF Inc, on the basis that the deal will go through.

Source: MIDF Research - 24 Jun 2019