INVESTMENT HIGHLIGHTS

• 1QFY20 results within expectations

• Higher traffic volume plying the LDP due to low base effect. There was additional public holiday post-GE14 last year.

• Lower finance costs and scheduled toll hike for Penchala Link-Mont Kiara lifts earnings slightly

• Risk from a potential takeover by the government still presides

• Maintain Trading BUY with revised TP of RM5.18 per share

1QFY20 results met expectations. Litrak reported a 1QFY20 net profit of RM67.8m (+19.7%yoy) which met our estimates, accounting for 27.5% of our and consensus’ full year forecasts, respectively.

Public holiday post GE14 impacted weekday traffic. The revenue of RM128.8m in 1QFY20 was +2.1%yoy higher mainly due to the higher traffic volume plying the LDP. The higher traffic volume was due to low base effect. There was a two-day public holiday following the 14th

General Election which dragged traffic volume in 1QFY19.

SPRINT returns back into the green. Cost management played a huge role during the period especially maintenance expenses which dropped by -40.3%yoy. Earnings in 1QFY20 were also lifted by the - 26.2%yoy drop in finance costs pursuant to repayment of borrowings in April 2019. In addition, the share of profit from SPRINT worth RM5.2m versus a share of loss of –RM1.1m a year ago underpinned earnings growth in 1QFY20, mainly attributable to the scheduled toll hike for Penchala Link-Mont Kiara Toll Plaza effective 1 January 2019 (assuming government compensation in lieu of toll rate hike freeze).

Outlook. Moving forward, the introduction of the unlimited monthly pass called My100 and My50 would encourage the use of public transportation, posing a downside risk on traffic volume. 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.

Earnings estimates. Our FY20 and FY21 estimates are maintained as results met expectations.

Target price. We revise our TP to RM5.18 (from RM5.21) pursuant to the slight enlargement of its share base. Our TP is based on the combined price tag of RM2.75b for both highway concessions (SPRINT and LDP).

Maintain Trading BUY. We reiterate our Trading BUY stance as we believe that the takeover offer by the government via Gamuda’s stake in SPRINT and LDP is appealing. The combined price tag of RM2.75b for both highway concessions translates to an effective offer price of RM5.18 per share (post enlarged share base) with a P/BV of 2.74x, a 10% premium to the current trading P/BV of 2.49x. Moreover, the anticipated offer price of RM5.18 per share constitutes a 10% premium to the last closing price of RM4.70 per share. LITRAK is also still deemed a defensive play with decent dividends yield of 5.3% for FY21, implying a forward PER of 9.7x, which translates to an earnings yield of 10.3%. This indicates an attractive spread of 7.1% against the latest 5-year Malaysian Government Securities yield of 3.2%. Downside risk for LITRAK would be the cancellation of the takeover of its concession or a revised price tag which fetches an unattractive valuation for shareholders.

Source: MIDF Research - 29 Aug 2019