Investment Highlights

• We maintain BUY on Perak Transit with an unchanged fair value (FV) of RM1.14/share based on a fully-diluted FY23F PE of 15x. Our FV reflects a neutral 3-star rating and is at a 30% discount to our FY22F target PE of 22x for Malaysia Airport.

• We continue to benchmark Perak Transit’s valuation against Malaysia Airports given the many similarities between the operations of an airport and a modern public transport terminal.

• Earlier this month, Perak Transit entered into a strategic alliance agreement which entails the appointment of Axiata Group’s edotco Malaysia (edotco), an integrated telecommunications infrastructure services company, to provide in-building and telecommunications solutions and structures in its buildings or lands.

• Perak Transit will effectively lease out parts of its property assets (its bus terminals and petrol stations) to edotco to build and operate telecommunication infrastructures, mainly telecommunication poles. In return, Perak Transit would be collecting monthly fixed rentals.

• The lease agreement also comes with a 3-year term with automatic renewal for another 2 terms. We also gathered that edotco, as the sole owner and operator, will bear all capital and operating expenditures for the deployment, operation and maintenance of these telco infrastructures, thus making this collaboration a risk-free endeavour for Perak Transit.

• This collaboration, in our view, remains in line with the group’s long-term strategy to capitalise on its existing assets by bringing in tenants from various sectors. Recall that it recently secured 2 logistic tenants and subsequently boosted the occupancy rate for its Terminal Meru Raya and Kampar Putra Sentral.

• While awaiting further details from management, we estimate that this venture could make smallish contributions of less than RM1 mil to FY22F-23F core earnings, assuming 10-20 telecommunications poles. Thus, we made no changes to our forecasts.

• On the other hand, its largest earnings contributors, namely Terminal Meru Raya and Kampar Putra Sentral, continue to see encouraging footfall recovery since end- 1QFY22, driven by eased travel restrictions and reopening of Malaysia’s borders.

• Over the mid-to-long term, the group’s growth drivers will be from the following:
  (i) Higher rental rates from its terminals upon the resumption of post-pandemic footfalls; 
  (ii) Stronger contribution from Kampar Putra Sentral stemming from the expiry of free-rental period and a higher occupancy rate as the student population returns from March 2022 onwards (to recap, the occupancy rate of Kampar Putra Sentral’s commercial area currently stands at 50% and tenants enjoy free rental during the movement control orders); 
  (iii) Bidor Sentral’s maiden revenue contribution from 2HFY23, with the construction of Bidor Sentral already commencing since FY21; 
  (iv) Full-year recognition of rental from 2 of its logistic business tenants in FY22F with an expected annual contribution of RM30mil–RM36mil. Additional potential upside stems from the growth of tenants under its revenue-sharing model;
  (v) Securing more asset-light third-party terminal management contracts (TMC).
• We continue to like Perak Transit for:
  1. Its unique business model in operating modern public transport terminals that emulate airports with spacious and brightly-lit shopping, dining and waiting areas as well as clean public facilities, particularly washrooms. These entice visitors to spend more money and time in the terminals prior to their departure or upon their arrival, or while sending off or picking up their loved ones. This captive traffic is monetised in the form of rental income from commercial units and advertising space within the terminal;
  2. Having proven the commercial viability of this business model in its interstate transportation hub, Terminal Meru Raya in Ipoh and the newly-opened Kampar Putra Sentral. Kampar Putra Sentral is also buoyed by a fast-growing student population in the campus town of Kampar. This student population has a high propensity to travel during school breaks and festivities as well as during weekends for leisure; and 3. The vast opportunities to replicate this successful business model. Already, it has at least
  3 more projects in the pipeline in Bidor, Tronoh and Alor Setar.
• Given that the stock is trading at an undemanding FY23F PE of 9x vs. 3-year average of over 20x, Perak Transit offers investors a good opportunity to own a defensive public infrastructure business. The group has the potential to replicate its business model for further growth.

Source: AmInvest Research - 21 Jun 2022