Jan 15, 2013

UEM to buy Sprint? Maintain Buy On UEM

Gamuda; Buy; RM3.73 Price target: RM4.75; GAM MK

It was reported in the press that UEM Group via PLUS Expressways is in advanced talks to acquire Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd (Sprint). It is believed thatthe purchase price is based on DCF
for the remaining concession period until 2031 for the 26.5km highway. The shareholders of Sprint are Litrak (50%), Gamuda (30%) and Kumpulan Perangsang Selangor (KPS).

It is an open secret that PLUS was in negotiations to acquire Litrakwhere Gamuda owns 45%, EPF 6.7% and Amanah Trustees 6.3%. Hence, the potential acquisition of Sprint is not entirely surprising also considering KPS had expressed interest in June 2012 to divest its stake. At Gamuda’s last analyst briefing in December 2012, we were made to understand that there were no further negotiations to acquire Litrak.

The attraction in just Sprint vs Litrak which also owns the 40km Lebuhraya Damansara Puchong (LDP) concession are the less matured natureof some its highways such as Penchala and Kerinchi and probably less controversial as compared to LDP which has been a sore point for the opposition party.

We would be positive on a potential sale provided it is based on DCF and factors in the potential toll rate increases throughout the duration of the concession. Our DCF Value for Gamuda’s 30% stake in Sprint is
RM415.8m or RM0.21/Gamuda share. With Gamuda’s relatively strong balance sheet with net gearing of 0.2x, we would not be surprised if at least half of the proceeds is paid in special dividends. This would translate into a modest yield of 3%.

Separately, it was announced that toll rates on Kesas highway have been reduced by between 10 sen to 40 sen effective yesterday. According to the Works Minister, toll rates will not be raised until 2016. This would be positive for the concession holder assuming cash compensation for the toll rate cut is forthcoming as traffic is likely to remain status quo. Gamuda also owns a 30% stake in Kesas.

We maintain our BUY rating and TP of RM4.75 on Gamuda. It remains our top pick for the sector.

by HWDBS Vickers