PLUS Expressways – Malaysia: Robust traffic volume momentum continues
Share Price RM3.39
Target Price RM4.00
• PLUS Expressways (PLUS) continued to report strong traffic volume growth in May 10.
• Recently, it acquired a toll-related business from its parent company, UEM Group.
• Commendable traffic growth. PLUS achieved a 7.6% yoy growth in May, bringing ytd traffic volume growth to 9.8%. The growth is still higher than our 3% growth forecast for 2010. But we think this exceptionally strong growth will begin to normalise in 2H10, due to the low traffic base effect in 1H09.
• Recent acquisition of toll-related business is a minor positive. PLUS recently acquired a 100% equity interest in Teras Teknologi (Teras) from UEM Group for a consideration of RM44m (valuing the company at 10x 2009 PE, similar to its previous purchase of a 20% stake in T&G). Teras is the company that introduced the Toll Revenues and Collection System (TRACS), the contactless smart card system known as Touch ‘n Go, and the non-stop vehicle on-board unit known as SmartTAG to Malaysia. We are not changing our earnings estimates as Teras is expected to contribute <1% to bottom line.
• Ongoing toll review. There is still no outcome from the ongoing toll rate structure review. But we think PLUS has a fairly good chance of getting its toll rate hike in view of two factors: a) the government is keen to cut its budget deficit, which will lead to a reduction in toll subsidies, and b) one proposal suggested to the government was to allow toll roads with alternative roads to have a toll rate hike. Nevertheless, we think either decision (i.e. toll rate revision or cash compensation by the government) should not materially affect highway concessions. We have assumed a 10% toll rate hike in 2011F.
• No change to our earnings forecasts.
• Maintain BUY with target price of RM4.00 derived from a 10% discount to our DCF valuation.
Share Price Catalyst
• Jump in dividend yield, earnings surge in 2011 from a big jump in government compensation and higher toll collection from a toll rate hike and robust traffic volume.