AmWatch - Construction Sector : Toll hikes: NPV neutral impact OVERWEIGHT, 15 Oct 2015

SECTOR FOCUS OF THE DAY

Construction Sector : Toll hikes: NPV neutral impact        OVERWEIGHT

The local press reported that toll charges for 18 highways in Malaysia will be raised between RM0.10 and RM3 effective from today. Altogether, toll rates for all eight highways under government-backed PLUS Expressway Bhd remained unchanged at this juncture. We believe this is part of Malaysian government’s move to meet its budget deficit target of 3.2% for 2015 (2014: 3.5%) and support its sovereign rating amid a challenging global economic backdrop. Prior to this, the government had since 2008, delayed toll rates hikes to soften the financial impact on toll users. Notably, federal compensation to highway concessionaires totaled RM1.1bil between 2008 and 2013 (2014: RM403mil). Using 2014 as a base, this could potentially translate into over RM2bil in ‘savings’ from toll compensation obligations over the next five years under the 11th Malaysia Plan period (2016-2020).

For construction stocks within our coverage, Gamuda (KESAS, SPRINT, LDP, SMART tunnel), IJM (LEKAS, NPE, Besraya) and MRCB have exposure to Malaysian highways. Only the former two have toll concessions due for toll hikes under the latest round. Toll assets account for 18% of Gamuda’s NAV; IJM (27%); and MRCB (8%). Based on historical trends, the latest round of toll revisions would likely trigger a dip in overall traffic performance over the next two to three months, although the actual quantum could be negligible. Furthermore, toll concessionaires have in the past, been duly compensated whenever the Federal government did not allow such increases as per concession agreements. Hence, we make no changes to our earnings forecast for Gamuda, IJM and MRCB. The impact from these new toll rates will largely be NPV neutral as our models had already assumed cash compensation for any non-increase in scheduled toll hikes.

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