EPMB’s management reassured investors that it can cope with
the high net gearing position after acquiring Maju Expressway as its free cash
flow is expected to be reinforced by a likely toll hike in 2013. We slash
earnings by 45-58% on expectations that MEX will not be earnings accretive
until 2015. While we concur with management that the toll concession is a
potential cash cow, EPMB would likely become an unappreciated counter in view
of the depressed margins arising from high interest and depreciation costs and
the fact that the acquisition does not jive with its core automotive business. Assuring
confidence. Yesterday, EP Manufacturing
(EPMB) organized an analyst briefing to address concerns and provide clarity on
its recent proposal to acquire Maju Expressway (MEX). The key takeaways of the
briefing are as follows:
- EPMB emerged as the successful bidder, just bidding RM50m
higher than the next bidder which could possibly have been a government-linked investment
fund.
- As traffic growth will be aggressive over the next few
years (at high teens) from the development of Putrajaya and Cyberjaya and with
the completion of KLIA2 by next year, management is confident that it can cope
with the high net gearing position (of 435% up from 33% last year) as its cash
flow will be strong. We concur with the management’s view on this, but we are
concerned with the higher depreciation and interest costs depressing overall
margins. We estimate that free cash flow generated to be RM45m in FY13 and
RM79.4m by FY12. As the toll matures in 10-15 years, free cash flow generated
will be robust and will exceed RM250m annually.
- Management sees this as an
attractive investment opportunity
as in the current political climate, building new toll
infrastructures will be an uphill task as this will involve navigating tricky
issues related to politics and land acquisition.
- The toll hikes scheduled for 2013, 2018 and 2023 could not
be disclosed as per concession agreement. As EPMB is paying the full price, the
potential tariff hike could be higher than our earlier estimate of RM0.50 sen
to RM2.40 (from an average collection of RM1.90 per vehicle in the past 3
years). We estimate a RM1 tariff increase in our DCF model for MEX.
- Management guided that earnings will only be accretive by
2016 at the latest. With the toll hike coming next year (definitely after
elections), we expect MEX to only be profitable by 2014 and report a net income
of RM7.2m by then.
- The potential opening of
the Seri Kembangan interchange
will be decided by the government in the
next few months. There are signs that this is likely to go through judging from
the strong demands by the public to ease traffic congestion in this area.
- Other than revenue from toll collections, advertising and
rental collections from R & R outlets, there could be other ways to expand
revenue base.
- Issuance of RM1.25bn and RM225m sukuk will have 20- and
7-year maturities at 5-6%. Indicative rating at AA-, which is the same rating
on the current sukuk floated.
Source: OSK188
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