Is Lingkaran Trans Kota Holdings Bhd Still Worth Looking At With The New Malaysia Government In Power?

As at 7 August 2018, Lingkaran Trans Kota Holdings Bhd, commonly known as LITRAK, is trading at RM 4.49 a share. It is a recovery from its lowest: RM 3.76 on 18 May 2018. But nevertheless, it is 25% below the stock price of RM 5.50 – RM 6.00 before GE14 in Malaysia.

Source: Google Finance

Evidently, LITRAK was rocked by the GE14 results as Pakatan Harapan, the newly elected ruling government of Malaysia has stated that it would review all highway concession agreements and take them over so that it can abolish tolls gradually. The affected concessionaires would be fairly compensated by the Pakatan Harapan Government.

To-date, the mechanism to work out a ‘fair compensation’ to concessionaires is not disclosed. Thus, it adds to an uncertain future to LITRAK. In this case, the question is:

1. Should an investment in LITRAK be aborted altogether?
2. Is this a chance to grab LITRAK’s shares at 25% below its stock price before GE14?

Here, I did a ‘post-mortem’ on LITRAK and had summarized my findings in the points below:

#1: Toll Concessions

LITRAK owns two major highway concessions in the Klang Valley under:

1. 100%-owned Lingkaran Trans Kota Sdn Bhd (LITRAK)
   It is the concession holder for the Lebuhraya Damansara Puchong or commonly known as LDP which is 40.0 km long. The LDP has 4 toll plazas namely, Penchala Toll Plaza, Petaling Jaya Toll Plaza, Puchong Barat Toll Plaza, and Puchong Selatan Toll Plaza. The duration of the concessions is 34 years from 1996 to 2030.

2. 50%-owned Sistem Penyuraian Trafik KL Barat (SPRINT)
   It is the concession holder for the SPRINT highway which is 26.5 km long. Currently, the SPRINT has 3 toll plazas such as Damansara Toll Plaza, Pantai Toll Plaza, and the Bukit Kiara Toll Plaza. The duration for both Damansara and Pantai Toll Plaza are for 36 years up till 2034 while the duration for the Bukit Kiara Toll Plaza is for 33 years up till 2031.

#2: Financial Results

LITRAK has reported consistent growth in both sales and profits for the past 10 years. Revenues had increased from RM 297.5 million in 2009 to RM 523.9 million in 2018. Coupled with reduced finance costs, LITRAK’s shareholders’ earnings grew from RM 102.1 million in 2009 to RM 228.6 million in 2018.

LITRAK has a 10-Year Return on Equity (ROE) averages 25.88% per annum. It means, LITRAK had made, on average, RM 25.88 in shareholders’ earnings a year from every RM 100.00 in shareholders’ equity from 2009 to 2018.

Source: Annual Reports of LITRAK

#3: Balance Sheet

LITRAK has consistently pared down its debt levels for the last 10 years. Total borrowings had been gradually reduced from RM 1.45 billion in 2009 to RM 1.13 billion in 2018. Its gearing ratio had dropped from 415.66% in 2009 to as low as 148.78% in 2018. In addition, its cash reserves had increased gradually from RM 375.5 million in 2009 to RM 579.6 million in 2018. Hence, LITRAK has improved the strength of its balance sheet over the last 10 years.

Source: Annual Reports of LITRAK

#4: Future Prospects

Presently, LITRAK has one final scheduled toll increase for the SPRINT. It is for the Bukit Kiara Toll Plaza in 2019 and the Damansara & Pantal Toll Plaza in 2022. LITRAK does not have any scheduled toll increase for the LDP. The future growth of LITRAK is greatly dependent on traffic flows from both of its highways. Their traffic flows would be impacted by the following projects:

1. The integration with Damansara-Shah Alam Expressway (DASH) at Penchala Interchange onto the LDP & the SPRINT highway and the upgrading of the Interchange by Empire Damansara development.

2. The upgrading of Bandar Puteri Puchong Interchange

3. The upgrading of Serdang Interchange by Lembah Penchala Sdn Bhd

4. The redevelopment of Pusat Bandar Damansara by Malton Group & the proposed construction of an elevated KL Eastbound Damansara Link section flying over the existing PJ Westbound alignment by the Dewan Bandaraya Kuala Lumpur (DBKL).

5. The integration at Kerinchi Interchange with the Setiawangsa-Pantai Expressway (SPE).

6. The construction of the MRT Line 2, stretching from Sungai Buloh to Serdang to Putrajaya.

7. The construction of the LRT3 from Bandar Utama to Johan Setia.

#5: Valuation

Here are a few methods to value LITRAK’s stock price at RM 4.49 a share:

1. P/E Ratio
   In 2018, LITRAK has reported earnings per share (EPS) of RM 0.433. Thus, at RM 4.49 a share, LITRAK’s current P/E Ratio is 10.37, which is below its 10-year P/E Ratio average of 15.87 (2009 – 2018) and close to its lowest P/E Ratio of 10.12 recorded in 2009.
   
   

2. P/B Ratio
   In 2018, LITRAK has reported net assets a share of RM 1.561. Hence, at RM 4.49 a share, its current P/B Ratio works out to be 2.88, which is also below its 10-year P/B Ratio average of 4.06 (2009 – 2018) and is close to its lowest P/B Ratio of 2.46 recorded in 2009.
   
   

3. Dividend Yields
   In 2018, LITRAK has declared and paid out RM 0.25 in dividends per share (DPS). Thus, at RM 4.49, LITRAK’s dividend yield is 5.57% per year. It is higher than its 9-year average of 4.63% presently, excluding dividend yield of 11.96% in 2009.
   

VIA’s Verdict on LITRAK

LITRAK has delivered consistent growth in sales, profits, and dividends to its shareholders over the last 10 years. Presently, its balance sheet is healthy with continuous paring down of debt and growing bank balances. From its annual report 2018, LITRAK has yet to receive any formal communications from the Pakatan Harapan government to discuss the mechanism of toll abolishments and how LITRAK would be compensated for it.

For now, LITRAK would continue to collect toll revenues and thus, allowing it to maintain its dividend payments to its shareholders. So, is LITRAK good for investment? It depends:

1. Is 5.57% dividend yield attractive to you?

2. Are you comfortable with the uncertainty of toll policies that would be implemented by the Pakatan Harapan government?

3. Are you willing to hold onto LITRAK’s shares if compensations that are proposed by the new government are not in favour to LITRAK?

4. LITRAK’s revenues are derived from two matured highways. There are no proposed new investments made by LITRAK to expand its source of income. Growth is limited to traffic flows and scheduled toll hikes available to the SPRINT highway.

5. How long do you intend to hold onto LITRAK’s shares?

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