PLUS Expressways: BUY at RM3.70, TP of RM4.25

PLUS Expressways Bhd
(July 29, RM3.75)
Maintain buy  at RM3.70 with increased target price of RM4.30 (from RM4.25): PLUS announced on Wednesday that it had entered into a sale and purchase agreement to dispose of its 60% stake in the Cimanggis-Cibitung Tollway to PT Bakrie & Brothers for IDR57.8 billion (about RM20.2 million). Currently, Bakrie owns 25% of the  highway. The disposal will be satisfied in cash.

There is a rationale for disposal. The 25km highway is supposed to link Cimanggis and Cibitung to form part of the Jakarta Outer Ring Road 2.

Recall that the concession agreement (CA) was never signed between the Ministry of Works and the JV parties. This was mainly due to the absence of a land capping clause, without which the concessionaire would not be protected from high land prices and may end up paying more than what was initially estimated.

The risks of this were amplified because the highway cuts through urban areas. With the land issue unresolved, PLUS has decided to dispose of its stake in the joint venture.

There are minimal gains from disposal. PLUS has invested RM17.8 million in its 60% stake. Including some expenses incurred in the past few years, the expected gain from the disposal is an insignificant RM1 million.

We are not making any changes to our dividend projections as the RM20.2 million cash proceeds are small compared to our annual free-cash-close-to-equity (FCFE) projection of RM1.2 billion to RM 1.6 billion.

Domestic traffic volume is still strong. Year-to-date (June) traffic volume growth along the North-South Expressway (NSE) has remained at a strong 9.8% year-on-year. Management has revised up its traffic volume guidance from 3% to 4% to 5% this year.

As for the proposed lane expansion along certain stretches of the NSE and New Klang Valley Expressway costing RM1.14 billion, management has guided that this will not affect its dividend policy (75% payout ratio).

We raise our traffic volume projection to 5% in line with management’s guidance and the strong 1H numbers.

This increases our FY2010 ending Dec 31, to FY2012 earnings by about 1.4%. Earnings are expected to jump 35% next year due to the scheduled rate hike along the NSE. Our target prices continue to be based on a 20% discount to the FCFE valuation (9.2% equity cost).

We like PLUS for its defensive nature and decent forward yields of 4.6% to 5.9%. — OSK Research, July 29

This article appeared in The Edge Financial Daily, July 30, 2010.