Investment Highlights

• We maintain BUY on Perak Transit with a slightly lower fair value (FV) of RM1.06/share (from RM1.14/share) based on a fully-diluted FY23F PE of 15x which is at a 30% discount to our FY22F target PE of 22x for Malaysia Airports Holdings Berhad (Malaysia Airports). Our lower FV reflects an enlarged share base following the recent private placement (10% of total issued shares or 63.5 mil shares) and an unchanged 3-star ESG rating.

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

• Perak Transit’s 1HFY22 core net profit (CNP) of RM29.1mil came in within expectations, accounting for 50% of our FY22F earnings and 48% of consensus. Hence, we make no changes to our forecasts.

• Perak Transit’s 2QFY22 revenue increased by 21% YoY to RM42.1mil, driven by higher contribution from the integrated public transportation terminal (IPTT) operations and petrol station operations. However, CNP expanded by only 10% YoY to RM14.9mil, dragged by heightened operating expenses and a 1%-point increase in effective tax rate to 26.3%.

• Notably, IPTT operations recorded a 13% YoY rise in revenue stemming from the additional rental income from logistic tenants at Terminal Meru Raya and Kampar Putra Sentral, which commenced in September 2021. For its petrol station operations, revenue grew 51% YoY, backed by the higher fuel price and volume as well as improved retail sales.

• QoQ wise, CNP moderately surged by 4% in tandem with a similar increase in revenue, mainly due to higher contributions from its IPTT operations. The group also declared a third interim dividend of 0.75 sen/share, bringing YTD total dividend for FY22 to 1.6 sen which represents a slightly higher payout ratio of 42% (compared to 38% in FY21).

• Key takeaways from the analysts briefing yesterday are:
  • The occupancy rates for Kampar Putra Sentral and Terminal Meru Raya currently stand at 50% and 75%. Nevertheless, management is targeting a substantively higher 70% occupancy rate for Kampar Putra Sentral over the near term.
  • Over the coming 1-2 years, the group does not expect rental reversions given the need to ease tenants’ financial burdens as footfall traffic gradually recovers in the aftermath of the Covid-19 pandemic.
  • For the project facilitation fee (PFF) segment, which is involved in the provision of services and rental of facilities to customers in the development of new terminals, the current orderbook is estimated at RM25mil which could sustain the group for the coming 3-4 quarters.
  • The construction of Bidor Sentral, which comes with an estimated gross leasable area of 257K sq ft, is currently 40% completed and is on track to commence operations by 2HCY23. We also note that the group does not foresee any financial impact from the increase in raw material prices since early 2022 as any cost overruns will be fully borne by contractors as stipulated in the signed contracts.
  • With regards to the tenancy agreement signed with TF Value-Mart which will see the supermarket chain taking up retail area of 52K sq ft in Bidor Sentral, we gather that the estimated monthly rental rate would be slightly lower than RM1/sq ft. Recall that the tenancy agreement entails a 3-year initial tenancy term, followed by 4 optional renewals of 3 years each.
• 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 rental recognition from 2 of its logistics 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).
• Given that the stock is trading at an undemanding FY23F PE of 12x vs. 3-year average of over 20x, Perak Transit offers investors a good opportunity to own a defensive public infrastructure business. The group also has the potential to replicate its recurring business model for further growth in other states.

Source: AmInvest Research - 17 Aug 2022