PLUS Expressway Bhd - BUY - 13 Jul 2009

PLUS Expressways- Interim solution for toll rates issues… (Company Update)

Price: RM3.18
Target Price: RM3.78
Recommendation: BUY

· A 20% discount for motorist who pays toll 80 times a month. The Prime Minister announced that a 20% shall be given to the motorist who pays toll more 80 times a month through electronic payment ie: Touch N Go and Smart Tag. This is the interim solution for the toll rates issues whilst the final decision is still under review by the Economic Planning Unit (EPU). The discount is effective from 1 September 2009.

· The interim solution will not undermine the earnings. We opined that the threshold of paying toll more than 80 times a month is generally high especially for Class 1 vehicles and the main beneficiaries are likely to be commercial vehicles. However, we are unsure the implementation of the electronic payment at the existing manual lanes for commercial vehicles. We envisaged that impact to the earnings is considerably minimal. On the positive note, the implementation of electronic payment will reduce the operating cost and the penetration rate is still low at 48%.
· EPU still looking at the solution. Our views on the EPU solution remained unchanged, neither the nationalisation of PLUS nor privatisation via Khazanah (64% stake). In our opinion, any amicable solutions to the toll rates issues will definitely address the toll compensations either cash compensation, supplemental agreement or further extension of concession period, which collectively will have a neutral impact to our derived net present value (NPV).

· Traffic volume is still defensive. YoY, May 09’s traffic grew by 1% despite the slower economic environment. We expect PLUS would be able to achieve 3% traffic growth in FY09. We believe that the deferment of the 10% toll hike this year, somewhat eliminates the traffic contraction whilst the government have been a good pay master to compensate the differences. As at 1Q09, PLUS have received a sum of RM93m or 50% of FY09 toll compensation from the government.

· We are maintaining our BUY call with target price of RM3.78. Pending further information regarding to the new discount scheme, we are maintaining our target price at RM3.78 as we believe it would not materially impact the earnings. The management is committed with 16sen dividend per share which translates to 5% yield at the current price and remains attractive for the dividend play.