Transport infrastructure still a yield selection

KUCHING: The transport infrastructure sector is expected to register better earnings amid the recent economic recovery and increasing number of upcoming projects.

ROBUST EARNINGS: CIMB Investment says the transport infrastructure sector is expecting to register better earnings amid the recent economic recovery and increasing number of upcoming projects.

According to CIMB Investment Bank Bhd (CIMB Investment), the share prices of transport infrastructure stocks rose by a lower average of 32 per cent compared with the Kuala Lumpur Composite Index’s (KLCI) 45 per cent gain last year, after slumping 30 per cent in 2008.

It cited the rebound last year was led by Suria Capital Holdings Bhd (Suria Capital), which notched up 71 per cent compared with 14 per cent for Bintulu Port Holdings Bhd (Bintulu Port) and only nine per cent for PLUS Expressway Bhd (PLUS).

Only Suria Capital outperformed the KLCI, partly due to its low base as it had been the worst performer in 2008. Bintulu Port and PLUS, however, under performed the KLCI last year.

Year-to-date, the performance of these stocks had been flattish, with Bintulu Port dipping four per cent.

As stated in the research report, the government was at the final stage of the restructuring of highway toll rates. The study on toll restructuring, which was being undertaken by an independent consultant, began in April last year and expected to be completed by the end of this month.

The Economic Planning Unit (EPU) would then review the study and come up with a decision, likely by the second quarter of this year, on whether to allow the scheduled toll rate increases this year. This would include future scheduled toll rate hikes as per the concession agreement (CA).

The research firm believed the study, which aimed to formulate a comprehensive solution, would benefit consumers in terms of more palatable future toll rate increases as well as preserving the sanctity/value of CA.

This would limit the government’s costs in terms of higher compensation to toll operators in the event of a toll hike deferment.

While the government had historically adopted a straightforward compensation formula to offset the forgone toll revenue by toll operators, applying this mode of compensation on a longterm basis might not be feasible and would be costly.

A palatable long term solution would, therefore, be an extension of concession life, added the research firm.

Notably, this move would involve the restructuring and renegotiation of Cas and an adjustment to existing scheduled toll rate increases. While concessionaires would still prefer cash compensation, this alternative would still be acceptable as it was likely to preserve the net present value (NPVs) of the concessions.

A recent example would the extension of the Besraya Highway (Besraya) stretch by 12 kilometre (km) and restructuring of the CA. This involved an extension of the existing 28 year concession life by eight years.

CIMB Investment estimated that the eight year extension would raise Besraya’s NPV by five per cent after taking into account the RM649 million cost for the highway extension, a flat toll rate throughout the extension period and an unchanged discount rate of 9.6 per cent.

Extension of the concession life in return for a reduction in toll rates had been applied in the past to various concessions including PLUS, Besraya, ELITE (Expressway Lingkaran Tengah) and NPE (New Pantai Expressway).

Historically, the toll rate increased since 2007 had been on the declining trend. The average 23 per cent toll rate increment allowed for six highways in 2008 was lower than the average 43 per cent toll rate hike in 2007.

For last year, the initial decision to allow an average 16 per cent toll rate increase for five highways toll took a u-turn when the government revoked its approval for the increase. While this meant that at least five highways were up for toll rate reviews this year, the trend of declining toll rate hikes suggested that the quantum of the increase in toll rates was likely to be small.

Nevertheless, concessio-naires could view this positively as it capped the downside risks of traffic volume growth, which should moderate this year given the higher base last year.

The recent recovery in economy would also benefit cargo throughput. The Malaysian economy rebounded to register a positive growth of 4.5 per cent year-on-year in the fourth quarter of last year, after three consecutive quarters of decline.

On a quarter-on-quarter comparison, real gross domestic product (GDP) growth expanded for the third consecutive quarter by 2.2 per cent, underscoring the strength of the recovery.

As a result, the research firm’s economic team projected a 4.8 per cent real GDP growth for this year.

Given that port cargo throughput was very closely correlated to economic and trade activities, the anticipated pickup of the economy this year augurs well for port operators.

As it is, cargo throughput volumes and shipments had already started picking up since the third quarter of last year. The gradual recovery of the global economy would also benefit transshipment ports such as Port of Tanjung Pelepas, said the research firm.

Apart from the underlying economic recovery, another growth driver for port operators in East Malaysia was the development of the RM105 billion Sabah Development Corridor (SDC) and the rollout of new industries under the Sarawak Corridor of Renewable Energy (SCORE), both of which would inevitably lift import and export activities and spur cargo throughput for the ports in the two states.

Based on all the given factors, a risk to cargo throughput was an unforeseen slowdown in economic activities. Since port throughput was directly and very closely tied to trade activities between countries, ports and shipping companies would bear the brunt of a slowdown in economic activities, evident from last year’s drop in cargo throughput handled.

In addition, while intra-Asia trade should hold up given the upswing of the Chinese and Indian economies, an unexpected slowdown in the Europe and US economies would have an impact on ports, albeit indirectly through the re-export of goods to these developed countries.

Another potential risk for port operators lay in the development of new ports. One such was the upcoming new port in Similajau, which could take up a slice of the export and import requirements in SCORE.

Recall that there were plans to build a new deepwater port in Similajau, which was approximately 50km from Bintulu Port.

The port was needed to support the import of raw materials of the aluminium smelters as well as other industries in the surrounding area.

However, the research firm did not think that the new port would replace Bintulu Port as the hub of import and export activities. In view of Bintulu Port’s connectivity and capacity, the likelihood was high for Bintulu Port to remain the state’s main gateway.

Looking at its valuation, CIMB Investment maintained neutral on transport infrastructure sector. The outcome of the review of toll concessions was likely to be revealed by end of the second quarter of this year.

Moving forward, one possible outcome would be the downward adjustment of future toll rate increases and extension of concession agreements, which should be net positive for toll concessionaires.

For port operators, the anticipated pick-up of the economy was positive given the clear correlation between GDP growth and port cargo throughput.

Apart from the underlying economic recovery, another growth driver for port operators in East Malaysia is the development of the two economic corridors for the states of Sabah and Sarawak.

The research firm believed the benefits from the sector were unlikely to be realised in the short to medium term as it would take time for the projects to be approved and rolled out.

Breaking down into companies, Bintulu Port’s group was upbeat on this year’s prospects given the up-tick in economic activities. LNG (Liquified Natural Gas) cargo, which accounts for over 70 per cent of the company’s revenue, would continue to be the key driver of the company’s performance.

For this year, PLUS strategy was underpinned by its new set of KPIs (key performance index), which included five per cent revenue growth driven by at least three per cent contribution from new business, return on equity of 18 per cent and dividend payout of 75 per cent.

Suria Capital, however, was more optimistic, projecting overall growth of port cargo throughput this year. It expected the port division to be the group’s key driver for this year.

Moving ahead, it was looking to purchase two gantry cranes for the Sapangar Bay Container Terminal for about RM43 million and investing RM32 million in a new Sapangar Bay oil storage and depot.

The group’s engineering division was bidding for a few major projects in Sabah following the completion of the Sabah Railway Rehabilitation project.

Based on 2010 contribution outlook, CIMB Investment maintained its target price for Suria Capital at a fair value of RM1.70 per share, Bintulu Port at RM6.60 per share and PLUS at RM3.84 per share.