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.

Kimeng: 27 feb PLUS (hold)

> Overtaking expectations
> FY07 EPS of 25 sen exceeded our estimate of 17.8 sen, thanks to
> better-than-expected traffic, an exceptional gain of RM70m and a lower
> tax charge. Traffic grew 7.7% (FY06: 1.3%), slightly ahead of our
> estimate of 7.0%. With that, Plus Expressway's (PEB) toll revenue rose
> 7.7% in 2007. Pretax profit rose a higher 18% thanks to a negative
> goodwill of RM70m arising from the acquisition of Linkedua. The tax
> charge was only 5% versus our estimate of 27% (which assumed provision
> of deferred tax), as PEB made no provision for income tax on its
> expressway profits due to the availability of tax allowances and tax
> losses, notwithstanding the expiration of its tax-exempt status on 31
> Dec 2006. Excluding the one-off gain of RM70m, core FY07 EPS would have
> been 23.5 sen (+6% Y/Y). PEB declared a final dividend of 8 sen
> (tax-exempt), bringing the total tax-exempt dividend in 2007 to 14 sen.
>
>
> Possibly more acquisitions to achieve performance targets
> In order to meet its targets, PEB is buying completed expressways,
> embarking on green field projects and expanding its existing
> expressways. Its key performance indicators (KPIs) are: a) 30% growth in
> the length of expressways by end-2009, with 20% to be achieved by
> end-2008; b) minimum revenue growth of 25% for FY08 and 5% for FY09 &
> FY10, of which a minimum 15% of the revenue in FY08 will be derived from
> the expansion of the business; and c) minimum dividend growth of 12% in
> FY08. PEB completed the purchases of Elite and Linkedua for RM866m in
> Dec 2007 (adding 573 lane-km or 15.7% of existing 3640 lane-km), and is
> on track to complete the purchase of Kulim-Butterworth Expressway by end
> Q1 2008 for RM134m. In Indonesia, it secured the concession for the
> 25.4-km Cimaggis-Cibitung Toll Road, in addition to the 116-km
> Cikampek-Palimanan Highway, which should start construction by end-2008.
> In India, its 21.6-km highway should start levying tolls by end-Q1 2008.
> As for the widening of the existing NSE, the southern stretches have
> been completed while the modifications of through traffic between Ipoh
> Selatan and Jelapang should be completed in Q3 2008. Despite these
> initiatives, PEB is still short of its 2009 target. As such, we believe
> PEB may make more acquisitions in the future.

Plus Q408

Robust 7.7% 07 traffic growth — This bumped FY07 net profit to RM1,247m (+13%). Excluding RM70m negative goodwill on the Linkedua acquisition. The final 8 sen tax-exempt dividend takes the full yeartotal to 14 sen (4% net yield; 56% net payout ratio). The company maintainsguidance for minimum 12% DPS growth in 08.

Besides,Newly acquired Linkedua and ELITE also performed well — 07 traffic growth accelerated to 11.9% and 6.6% respectively (06: 4.4% and 2.7%). Their contribution to PLUS’s 07 EPS was minimal as the acquisitions were completed on Dec 18.

 Clarity on implications of single-tier tax system would be appreciated — The government compensates PLUS via tax rebates on dividends that would have been taxable under the current imputation tax system. The single-tier system negates this benefit. Management is still unable to articulate its proposal for alternative compensation under this new regime.