Its shares have risen 12% after the company says it will sell 40% of Duke concession to EPF
SHARES of Ekovest Bhd have risen almost 12% since the Employees Provident Fund (EPF) expressed interest to buy 40% of its Duta-Ulu Kelang Expressway (Duke) highway concession.
On Wednesday, Ekovest announced it was selling a 40% stake in Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd (Kesturi) for RM1.13bil cash to the EPF. The deal values Kesturi, which is the concession holder of Duke, at about RM2.825bil.
Subsequently, tongues were set wagging on whether the deal is expensive for the pension fund.
“Some think that the deal is on the high side because they based it (on) the purchase figures. When we acquired Duke, the plan for Duke 2 or Duke 3 had yet to materialise. The purchase figure makes sense after taking into consideration that Duke 2 and Duke 3 will eventually supply traffic into Duke 1.
“Since the acquisition, Ekovest has further complemented and created value for the assets. There were no Segar (Segambut Rest and Service Area) when we acquired the assets then. The concession period for the highway is also longer now following the supplemental concession agreements,” Lim tells StarBizWeek.
He adds that the value is reflective of today’s valuation.
Lim also disclosed that the group has received offers from international buyers who were interested in its highway assets but they would prefer the assets to be sold to Malaysian entities, which can reduce the capital outflow from Malaysia.
In 2012, Ekovest first bought a 70% stake in the 18-km Duke with a 34-year concession under a RM325mil share-swap deal with Wira Kristal Sdn Bhd.
Ekovest later acquired the remaining 30% stake in Duke from Malaysian Resources Corp Bhd (MRCB) for RM228mil in 2013. At the time, the deal valued the Duke highway at RM553mil.
Astramina Advisory Sdn Bhd managing director Wong Muh Rong concurs that the transacted value between Ekovest and EPF is fair.
Astramina is the financial advisor for the proposed disposal.
“From a quantitative perspective, the deal is reasonable for the purchaser and fair to the vendor.
“More importantly, the vendor will have future unquantifiable benefits from having the EPF as a strategic partner, not just for this, but for future exercises.
“The vendor could have easily sold the asset to a foreigner who would have given a higher price, but that would cut out and take away a lot of the qualitative benefits from having the EPF as a partner,” Wong says.
“On the other hand, the purchaser is able to lock in the price before tolling but is entitled to the benefits of deferred payment and enjoy the benefits of tolling,” she says.
“If foreigners were to buy this assets, the price would be much higher compared with what EPF is paying. The offer can be easily at least 30-40% higher,” Wong estimates.
Ekovest unit, Nuzen Corp Sdn Bhd, signed a binding term sheet with the EPF to sell the stake on Wednesday.
The stake comprises two million shares and 18 million redeemable preference shares of RM1 held in Kesturi and 1.44 million new shares.
In its announcement to Bursa Malaysia, Ekovest said the sum would be paid in three parts.
When the sale is completed, the EPF will pay RM921mil cash, as part payment to Nuzen and a further RM60mil once the certificate of practical completion is issued for Duke phase 2.
The EPF will then pay RM149mil cash to Nuzen, subject to the achievement of pre-agreed targeted returns in the event of certain exit scenarios.
According to the latest data from Bloomberg, Tan Sri Lim Kang Hoo is the largest shareholder of Ekovest, with a 20.19% stake.
Kota Jayasama Sdn Bhd owns 13.84%, Ekovest Holdings 12.19% while Lim owns about 6%.
An EGM will be convened for the proposed disposal. Judging from the combined total shareholdings from its major shareholders, the company is unlikely to face much obstacles in obtaining shareholders approval to push the deal through.
On the proceeds of sales, Lim says the company needs some “vitamin M” to build up its war chest for its expansion and will give back some returns to its shareholders.
Astramina’s Wong says the details would be announced in 30 market days. She hints that the returns to shareholders is likely to be higher than that of the current yield of about 1.5%.
The government allowed Ekovest to hold the concession for Duke 1 for 34 years. Following the approval of the Duke 2 concession, instead of awarding a completely new concession, the government moved to extend the existing concession period of Duke 1 by another 20 plus 10 years, which includes Duke 2.
In 2015, Duke Highway’s actual traffic volume hit 48.136 million vehicles, not far from its projected forecast of 48.386 million. In 2014, traffic volume was 45.65 million.
Ekovest has also achieved the financial closure for Duke 3 project.
It has recently signed an agreement with four local banks to issue ringgit-denominated sukuk wakalah worth RM3.64bil to partly fund its Setiawangsa-Pantai Expressway (SPE) project, formerly known as Duke phase 3.
The 32.1-km highway is estimated to cost RM5.05bil, taking into consideration the debt service covering ratio within the construction.
Ekovest is currently constructing the expansion of phase two of Duke, costing RM1.18bil, which is estimated to be completed by year-end.
The extension will expand the existing Duke from two ends; via a 7km link from Sri Damansara and a 9km link from Jalan Tun Razak.
On its construction division, Ekovest has a total of RM6.32bil, total outstanding orderbook of RM5.28mil and outstanding external orderbook of RM4.47bil.
On its property ventures, Lim explains that it has a total gross development value (GDV) of RM7.781bil. Its maiden project, EkoCheras, has an estimated GDV of RM2.11bil.
Landbank
Ekovest has some 34 acres of landbank within Klang Valley and 25 acres in Danga Bay, Johor Baru.
According to UOB Kay Hian, Ekovest is a deeply undervalued contractor and concessionaire. Its recent announcement of the 40% sale of Duke 1 and 2 to EPF implicitly values just one of its many assets at RM2.8bil, significantly below its RM1.7bil market capitalisation.
Apart from that, the group was also recently granted a 53.5-year concession to build and operate a new 50km urban expressway, which would support the construction arm’s medium-term profit growth and provide a longer-term boost to valuations and earnings.
UOB Kay Hian has initiated Ekovest with a “buy” call and a sum-of-the-parts-based target price of RM3, implying FY18 forecast price-earnings multiple of 18.2 times, supported by a three-year earnings compounded annual growth rate of 68%.
The research house says Ekovest’s longer-term outlook was given a boost with the recent announcement that it has been granted a 53.5-year concession to build, operate and transfer the new 50km SPE that links MRR2 at Taman Melati to Kerinchi Link at Federal Highway.
It says the new expressway would enhance the medium-term orderbook visibility, as the group would snap up much of the construction jobs worth over RM3.7bil.
“We expect the construction jobs to contribute RM139mil-RM212mil per annum to Ekovest’s financials for the next three years,” UOB Kay Hian says.
It says Ekovest’s RM4.5bil external outstanding orderbook represents a superior orderbook cover of 5.6 times, significantly above that of other construction companies under its our coverage (1.7x-3.8x). About 84% of the outstanding orderbook is from the SPE.
“We gather that the group is aiming to secure another RM1bil worth of infrastructure-related construction jobs in FY17,” it adds.
UOB Kay Hian notes that when Duke came into operations, Class 1 vehicles were charged a toll rate of RM2.
However, in October 2015, the rate was raised to RM2.50 and the scheduled toll rate hike is expected to take place in 2019.
“In 2019, we project flat traffic growth for the expressway given the toll rate hike. However, we expect users to accept the new rates and move on as alternative routes are expected to remain congested compared with Duke 1 and 2,” it says.
UOB Kay Hian says based on a traffic study conducted by consultants Perunding Trafik Klasik (PTK), several new mega developments will benefit from the expressway, including the Tun Razak Exchange and Bandar Malaysia, but these developments are assumed to take two to three years before contributing stable traffic volume to the SPE.
PTK also takes the view that the SPE will complement the use of public transportation as the expressway intersects the Klang Valley rail networks.
Ekovest shares have been on an uptrend, gaining some 82.2% year-to-date at RM1.92 yesterday.
The stock is currently trading at 1.2 times its book value.
