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Saturday, May 26, 2007

LITRAK News - Commentary

The Star posted an article on LITRAK today - http://www.biznewsdb.com/english/newspage/newspage.asp?ID=7052616&file1=7&bulan=05&kw=wwqq.

My usual highlighting and comments in italics below:


Litrak sees rebound after toll hike
Updated : 26-05-2007
Media : The Star
Story By : DARSHINI M. NATHAN via www.biznewsdb.com

LINGKARAN Trans Kota Holdings Bhd (Litrak) was thrust into the limelight early this year after the scheduled 60% toll hike for the Damansara-Puchong Highway (LDP) triggered a backlash among consumers.

But with uncertainties over the toll rate hike now resolved and traffic volume on the highway recovering somewhat after suffering in the first few months of the year, the investment case for Litrak is starting to look a lot more appealing.

[As I highlighted earlier in my first posting on LITRAK, as well as others who called LITRAK before me, the investment case for LITRAK looked really appealing when its stock price fell to as low as $2.60 in February this year.]

At the heart of it all is the fact that the toll concessionaire is fast turning into a cash cow. Its rising free cash flow (FCF) has emerged as the key driver of several research houses' "buy" ratings and revised target prices.

Most of the analysts tracking Litrak are banking on the company announcing a second capital repayment exercise as early as the second half of this year.

[To the best of my (limited) knowledge, this is not confirmed by LITRAK yet. However, I would not be surprised if it occurs in 2nd half of this year.]

Litrak embarked on its first capital repayment in November 2005, when it announced a distribution per share of 25sen.

This time around, analysts say the quantum is likely to be much higher. Most of them reckon a distribution of at least 50 sen per share could be on the cards.

[It pays to be a little skeptical whether it will really be 50 sen. Below, AmResearch is projecting 26 sen EPS for FYE 2008. My own projection is around 31 sen. There needs to be a very strong reason to make a capital repayment that is larger than the yearly earnings, since this would most likely mean that LITRAK would need to take on extra borrowings. Personally, I would be more than satisfied with a capital repayment of say 25 sen, same as last year, as it would imply a yield of 0.25/3.5 = 8.3% net of tax ... very, very nice].

There are several reasons for their optimism. The government-approved toll hike that took effect on Jan 1 this year means that motorists using the highway now have to pay RM1.60 compared with RM1 previously.

With that, some expect the LDP to generate an operating cash flow (before debt obligations) of about RM200mil per annum for Litrak in financial year (FY) March 2008.

[Most likely an error by the journalist. Already, the operating cash flow reported in LITRAK's latest quarterly report is larger than $200M, and closer to $300M. I don't expect LITRAK's cashflow to reduce in 2008 after the toll rate hike. ]

The agreed toll rate under the concession agreement however was much higher at RM2.10.

The government has agreed to a compensation package, which comprises a cash payment of RM150mil, to be paid in two tranches this year and in 2008, and a one-year extension to the concession period. Litrak received the first tranche of the compensation worth RM75mil in January.

[Most likely another error by the journalist. If LITRAK has already received the $75M, how can its quarterly "Revenue" be reported as only $69M? Also, how can its "Other Income" be reported as only $13M? Examining LITRAK's quarterly reports and studying its notes in detail, I believe LITRAK has not yet accounted for this in its earnings statement.]

This would boost its revenue and earnings in the fourth quarter of FY07. A local research house estimates that this would lead to a revenue growth of 3% and 12% in FY07 and FY08, respectively.

[There is no need to estimate FY07 revenue growth, as it is already reported by LITRAK last night. The actual revenue growth is $256M / $243M, or approximately 5.3% growth for FY07. Another poor reporting by the journalist.]

Litrak, which also operates and maintains the SPRINT or Sistem Penyuraian Trafik KL Barat highway for a period of 36 years ending December 2034, is set to announce its results for FY07 this week.

[Again, LITRAK already announced its results last night]

Apart from the compensation, the latest figures will also reflect the net gain of about RM11mil it realised from the disposal of all its investments in quoted shares in the third quarter of the last financial year.

AmReaserch, however, notes that higher losses at SPRINT following a staggered step up in its finance cost since the second quarter of FY07 could throw a dampener on Litrak's FY07 earnings.

Litrak's share of SPRINT's losses is expected to peak in FY07 at RM21mil, before falling to RM9mil-RM11mil over FY08-09. The research house, nevertheless, says SPRINT's cash flow would gradually improve if it successfully restructures its Islamic bonds. It is also up for a toll rate increase on the Kerinchi and Damansara links next year.

Milking the cow

Until then, the focus remains on the LDP. Traffic volume on the LDP has fared better than expected after the toll rate increase. According to AmResearch, daily traffic volume declined 8%-10% in the first two months of the year, compared with last December. However, the figures for March and April apparently suggest that volume has rebounded slightly.

[I have some doubts about the 8%-10% decline. I believe it is larger. Q3/07 Revenue (for 1 Oct - 31 Dec 06 period) reported was $62.4M, at $1 per entry (or approx 62.4 million entries). Q4/07 Revenue (for 1 Jan - 31 Mar 07 period) was $69.6M, at $1.60 per entry, or approx 69.6/1.6 = 43.5 million entries. So, reduction is 1-43.5/62.4 = 30% from Q3/07. So, 8-10% decline seems a bit on the small side. Nevertheless, despite the decline, net earnings still grow significantly due to the large toll rate hike.]

As pointed out by Aseambankers, there is limited downside risk to the LDP's traffic volume growth ahead owing to the lack of an alternative route to the LDP. The 40km toll road also stands to benefit from the frantic pace of development in the Bandar Sri Damansara, Damansara Perdana and Mutiara Damansara areas.

[Good points. Nice economic moat so far. Nice potential for growth / limited downside risks.]

This has prompted AmResearch to upgrade its FY08 traffic forecast to a growth of 1.5% from 7% contraction previously. Its analysis shows that every 1% increase in LDP traffic volume would lift FY07-FY09 earnings by 2%-4%.

"Factoring in a nine-month impact from the 60% hike in LDP toll rates, we project Litrak's FY08 core earnings per share to rise 60% to 26 sen,¨ it says.

[It's unclear what is meant by "core earnings", but if 26 sen is the full EPS, then, I believe AmResearch is too conservative with the 26 sen EPS. FY2008 (1 Apr - 31 Mar 2008 period) will reflect the toll-rate hike fully. My personal estimate is at least 31 sen, including $37.5M government compensation. However, if anyone has AmResearch report, I would appreciate receiving a copy for further perusal. Thanks.].

Early this month, the investment research outfit issued a report on Litrak to highlight its revised target price of RM4.50 per share.

[Not unreasonable, although I think a bit lowish since my own target price is $4.70 to $5.60 - see my earlier posting for the basis. Interestingly, the implied P/E is 4.50 / 0.26 = 17.3, which is within the range of 15-18, and not unreasonable compared to investssmart P/E of 15, Deutche Bank P/E of 18, and my earlier P/E range of 14-17, although bear in mind that P/E are not absolutes, and it may be better to apply a relativity principle rather than an absolute principle to P/E.]

The higher net asset value (NAV)-based target price reflects the lower discount to NAV of 15% it has now ascribed to the shares, as opposed to 35% previously.

AmResearch reckons that with uncertainties over the LDP toll rate hike resolved, the company's FCF is likely to rise to anywhere between 33sen and 50sen per share from FY07-FY09, compared with 16 sen per share in the latest financial year.

That the toll concessionaire's parent company Gamuda Bhd has raised its stake in the former to 43% from 38% a year ago supports the case for the capital repayment. Gamuda started accumulating shares in Litrak since January last year. The idea is to bring its stake closer to 50%.

[Interesting, although I have not personally heard yet that GAMUDA intends to raise its stake to 50%. I would appreciate it if any readers can help confirm this, e.g. from past press releases, etc.]

However, under the Securities Commission's ruling, Gamuda can only acquire up to 2% of Litrak shares every six months or it will trigger a mandatory general offer for the rest of the shares it does not own.

[Interesting ... although I am surprised since other companies could do this without triggering an MGO - e.g. OSK's shareholding of OSKVI is higher, and it increased its shareholdings more than 2% in 6 months without triggering an MGO ... Appreciate comments from more knowledgeable readers.]

On its part, Gamuda has guided that it would reward its shareholders with a dividend of 46 sen per share or net dividend per share (DPS) of 33 sen going forward, from 12 sen per share net DPS currently.

It is understood that part of this dividend payment would have to be financed using the higher dividends it receives from Litrak.

The toll concessionaire's management is also working on extending the maturity of some of the debt taken on for the LDP to match that of the concession's lifespan. Whereas the LDP's debt expires in 2016, the concession ends in 2030.

If this happens, and given that the company has no significant investment capital expenditure plans in the near to medium term, it would free up cash that could be returned to shareholders.

A foreign research house suggests that Litrak may also choose to take on additional debt, given its net gearing of slightly above one time is backed by some solid recurring concession earnings.

[In the earlier posting, I note that LITRAK has actually reduced its debt in Q4/07. So, IF LITRAK were to take on additional debt in 2008, then, it could mean several things, including the possibility that it may wish to make a higher capital repayment than supportable by current year's earnings & cash holdings.

The speculative reason that GAMUDA wants to pay higher dividends to its shareholders is interesting... hmmnn ... since I don't yet know for sure, let's wait and see since to me, LITRAK's business case is already so good that I'm more than happy if LITRAK pays the same amount as last year.

Unfortunately, the name of the foreign research house is not supplied. Does anyone know?]

At this juncture, it is still not tax efficient for Litrak to pay out dividends, as it does not have enough tax credits to frank the dividends. As a result, the toll operator's dividend yields are below the regional average.

Given those circumstances, a foreign research house says it is important that Litrak embarks on a capital repayment exercise to enhance return to shareholders.


Valueguy said...

Thanks for your sharing on Litrak.
I afraid that the toll rate you used to calculate Litrak revenue before rate hike is not accurate.

Before the rate hike, the toll rate is RM1.00 before government top-up. After top-up from government, the effective toll rate is RM1.50.

After the toll hike, the toll rate is RM1.60 plus 35mil p.a. from government.

Thus, government top-up per quarter will be 35mil divided by 4 =8.75mil.
Substrate this money from Revenue, we have the money Litrak collected from toll from 1/1/2007 to 31/3/2007-->61 mil

The quarterly revenue before toll hike was 62.4 mil. If the traffic volume unchanged after toll hike, the revenue should be 62.4mil *1.6/1.5= 66.6mil. Compared to what Litrak collected (61 mil), It can be concluded that the traffic volume was 8.5% lower. This is pretty close to what management mentioned about 10% decrease in traffic volume.

Seng said...

Dear Valueguy,

Thanks for your comments. Since I didn't talk to management directly, I have a few questions that I would appreciate your clarification:

1. You mentioned "This is pretty close to what management mentioned about 10% decrease in traffic volume."

Could you quote the source, as I am not sure if it was actually you who spoke to management directly?

I presume you must have read this from somewhere, so, I would be grateful if you could quote this source.

2. In Q4/06 notes which the company filed to Bursa, page 9, section 11 stated ... "the Government has agreed to provide LITRAK with $150M cash compensation (payable in 2 tranches within the calendar years of 2007 and 2008).".

Are you saying this is really no 2 tranches of payment, but regular quarterly payments?

Could you quote your source?

3. In the news article above, the newspaper also reiterated the 2 tranches, further suggesting that the payments have yet to be made to LITRAK. In other words, both news paper and Q4/06 notes filed to Bursa are consistent with each other, and more importantly, inconsistent with your claim. So, can you quote your source?

4. In Q1/07 notes, there is no mention of regular quarterly payments either. In fact, there is referral to Q4/06 announcement ... "full effect from the revised toll rates approved by the Government as stated in the previous quarter's announcement".

5. As you can see, my analysis had relied purely on public information, with no access to management. It is quite possible, that if management supplied incorrect data in their published reports, and this then gets published in newspaper, then, the whole world would make an incorrect analysis since "garbage in, garbage out".

I would greatly appreciate your clarification on 1. to 3. above.


Valueguy said...

1) pls look at this link http://www.biznewsdb.com/english/newspage/newspage1.asp?ID=7012974&file1=7&bulan=01&kw=Litrak
2)It is 2 tranches of payment. However,this 150mil compensation is to compensate Litrak from 2007 to 2010. Thus, in P/L account, it has to be booked as revenue regardless when will it receive the money. This mean that even Litrak has not received the money from government, it will book those compensation as revenue and increase its receivable in its balance sheet. You must not confuse P/L account and the cash flow a/c.

Seng said...

Dear Valueguy,

1) Many thanks for the link. It's comforting to note that traffic volume drops by 10% in January 2007. I suspect this compares with January 2006 and not Dec 2006, but I'll get to that later.

2) I fully agree with you that in the ideal world, LITRAK should apportion the compensation payment of $150M fairly over the 4 year period. However, as I have neither worked in LITRAK, nor have I worked as an accountant in Malaysia, I cannot assume that LITRAK accountants will automatically do the right thing, like you did. Your position is not unreasonable, but at the time, I took the suspicious position, that LITRAK might try to account the full cash to artificially boost earnings.

However, after your note, I took a closer look at Deutche Bank report, and according to them, LITRAK has apparently, already received the first tranche of $75M, which they used to reduce borrowings. Borrowings have certainly reduced by that order of magnitude (comparing Mar 07 vs Dec 06). Which means they really need to set up a liability as a reserve, since this amount relates to the full 2007-08 years, and only 3 month has passed (i.e. there needs to be a reserve for another 9+12 months).

There is an item called Deferred Revenue in 31/3/07 Balance sheet of $102M, which seems too large (bigger than $75M) ... Also, it is categorized under Non-current Liabilities, as opposed to a split between current and Non current Liabilities ... Nevertheless, if DB report is to be believed (and it is not inconsistent with the borrowing reduction), then, they would appear to have been prudent in their accounting, by setting aside the $102M amount ... (my guess is they've set aside something close to 7/8 of the $75M, plus other things which I don't know about). And they've also done the responsible thing by immediately reducing debt. Given this level of prudence and responsible practice, perhaps my suspicion of possible hanky-panky might be a bit harsh.

So, since we can trust LITRAK's accountants at least on this limited aspect and for this limited period, then, I agree with you that the traffic volume need to recognize that the toll rate is $2.1 for Q4/07 ($2.1 =1.6+0.5) and $1.5 for Q4/06 (1.5 = 1 + 0.5 - I didn't factor the 0.5 earlier).

So, Average Traffic per day for Q4/07 = $69.6/2.1/90 = 368k

Average Traffic per day for Q4/06 = 59.1/1.5/90 = 410k.

Reduction = 1-368/410 = 10%.
(the absolute figures for the Ave Traffic per day might not be comparable to management reports, but the % reduction should be close to what they report).

If this analysis is correct, then, it implies that for the 3 months to 31 Mar 07, traffic volume still hasn't picked up from January 2007 (per article). Perhaps it's still too early to judge, but we need to take a closer look at this coming quarter's results to see if traffic volume improves.

And in light of this discussion, I now feel that I may have been too optimistic on LITRAK's regular EPS for 2008. (I previously mentioned 31 sen). Now, I think it's closer to 28.5 sen (assuming 10% traffic volume reduction from prior year - previously, I assume a more optimistic improvement). This will lower my estimated Intrinsic Value, to $4.3 to $5. In other words, I think the potential upside is still better than F.D. rates in the next 12 months, but not a hell of a lot better, from current price of $4. Unless traffic volume turns out to improve better than what we've seen in Q4/07 ...

Thanks for your comments. Nice to have someone reading my blog critically and commenting on it intelligently. Appreciate it.