PLUS : Downgraded to HOLD from buy at RM4.46 with TP RM4.60

PLUS — Attractive exit opportunity

PLUS Expressways Bhd
(Oct 18, RM4.34)
Downgraded to hold from buy at RM4.46 with target price RM4.60: EPF and UEM, via a special purpose vehicle (SPV) made a joint offer to buy all the assets and liabilities of PLUS both locally and abroad for RM23 billion or RM4.60 per share. This is not a general offer, and minorities will receive a cash payment via special dividends and a capital repayment later that will be equivalent to RM4.60 per share. We see limited upside to the offer price and investors may want to take profit as the process could be lengthy and a capital repayment requires High Court approval. The offer price is also at a 9.5% premium to our discounted cash flow-derived target price (TP) of RM4.20 (WACC 6.1%, beta 0.7 times).

There is no clarity on PLUS’ toll rates in the longer term, but Budget 2011 disclosed that toll rates for all   PLUS’ four concessions would remain flat for the next five years. Despite the SPV’s strong financial backing and the potential restructuring of PLUS’ debt to release more upfront cash flow, it remains challenging to extract further value from PLUS at the offer price. And at RM4.60 per share, the 4% dividend yield is lower than EPF’s distribution yield of more than 5% and 10-year MGS yield of 4.4%.

The strong 7.7% traffic volume growth year-to-date August 2010 will not be sustainable in 2011. The eventual unwinding of fuel subsidies as proposed by Pemandu, and higher base effect in 2010, will result in more tepid traffic volume growth. We are comfortable with our 2% traffic growth forecast for 2011. We also think recent consensus upgrades in TP, which are above the offer price, assume too aggressive traffic growth.

Overseas acquisitions are nascent and contribution will be immaterial. PLUS is making inroads into India with the most recent acquisition, the 127.6km NHAI project in the state of Gujarat possibly enabling it to get more projects with the IDFC. But its 26% stake is small and will not help its KPIs. On the local front, we also see little room for further acquisitions until the government addresses the toll rates issue. — HwangDBS Vickers Research Sdn Bhd, Oct 18


This article appeared in The Edge Financial Daily, October 19, 2010.