[News]: Is Asas Serba’s proposal really workable?
Is Asas Serba’s proposal really workable?
http://biz.thestar.com.my/news/story.asp?file=/2010/5/5/business/6192369&sec=business
by Risen Jayaseelan
THE proposal by Asas Serba Sdn Bhd to take over all the domestic toll highways at a RM50bil price tag seems fairly attractive – on paper at least.
The company promises to cut toll rates by 20%. Not only that, its brilliant but still sketchy plan will entail removing the Government’s need to subsidise toll operators.
And the best part, the company is able to do so without asking the Government for an extension of the existing concession periods, as was earlier feared.
Tempting offer
Any government in the world, especially one seeking a re-election, would be seriously tempted by this offer. Toll roads remain a major grouse of the public, especially in Malaysia, which is one of the most “highly-tolled” countries in the world.
Asas Serba is also offering, what it deems to be an attractive exit offer, to existing shareholders and bondholders of the highway companies.
Asas Serba bonds will be offered an annual coupon rate of 7% and a profit sharing element of between 2.5% to 5%.
But can the company really pull this off? Lets take a closer look at its financing plan. PLUS Expressways Bhd, which makes up about 61% of the combined revenues of the toll companies, would cost Asas Serba around RM20bil to takeover.
This is based on the market capitalisation of PLUS and a premium of just under 20% over the market price.
Asas Serba says its acquisition costs will be financed by 90% debt (bonds) and 10% equity. So 90% of RM20bil equals RM18bil to be raised via bonds.
Providing a coupon rate of 7% of RM18bil would amount to some RM1.26bil per annum that the new highway owner would have to fork out.
But an analyst from a bank-backed brokerage points out that PLUS has existing debts to the tune of RM11bil.
Assuming that Asas Serba refinances this debt at the same rate of 7%, then there’s an interest charge of about RM770mil per annum.
Hence in total, Asas Serba (or the special purpose vehicle that is used to take over the highway assets) would need to fork out about RM2.03bil in cash, just to takeover PLUS.
Will PLUS’ cashflow support this?
For financial year ended Dec 31, 2009 (FY2009), PLUS’ cashflow from operations and investments totalled RM1.5bil.
But included in that amount was about RM200,000 in compensation from the Government. (The Government had compensated PLUS a total of RM800,000 in FY2009, but about RM600,000 was in non-cash items such as tax waivers.)
Removing that cash compensation (as Asas Serba talks about a subsidy-free system), the cashflow would dip to RM1.3bil.
If toll rates are reduced by 20%, cashflow would be further reduced to about RM1.04bil.
Growth in traffic volume
To be fair, what needs to be imputed in the numbers is growth in traffic volume.
Asas Serba’s financial model assumes a traffic growth volume of around 3.5% per annum.
The analyst says that if traffic growth volume is included into PLUS’ concession, which ends in 2038, PLUS’ cashflow should rise to RM2.8bil by the end of the concession period (compounding 3.5% on the base cashflow figure of RM1.04bil for FY2009).
By averaging the RM2.8bil over the remaining tenure of the concession period, the analyst said PLUS’ annual cashflow from operations and investments should hit about RM1.8bil.
However, that still means there could be a shortfall of some RM230,000 to cover the yearly interest and dividend payments. And that’s not including any payment towards the principal sum borrowed, as bonds mature over time.
Asas Serba claims it will be able to achieve higher operational efficiencies from simply running things better as well as garnering economies of scale from having all the toll highway operations under their management.
The company also talks about new non-toll related revenue streams, possibly from more aggressive bill-board and other advertising opportunities.
Other concerns
While all of this sounds great on paper, there are other concerns as highlighted by OSK Research in a report.
Firstly, toll operators like Gamuda Bhd and IJM Corp Bhd rely heavily on toll collections to smoothen the volatility of their cashflows from other operations.
Would these concessionaires participate in the proposed consortium? At what price would they sell out? Recall the problems that the Selangor water consolidation is going through.
Secondly, the massive amount to be raised via bonds for the entire exercise, at around RM45bil, would be difficult for the market to digest.
Would investors in these bonds, probably the likes of the Employees Provident Fund, be wise to expose themselves in such a big way to a single sector such as highways?
Worse, history may repeat itself – could the day come when Asas Serba, controlling a prime national asset, would have to be bailed out? It has happened before.
There’s also concern that Asas Serba may not maintain the highways as well as the current operators. Asas Serba director Ibrahim Bidin said market forces would dictate that they would. “If we don’t, the number of highway users would drop and our toll collections will decline. Our bondholders would then come after us.” Fair enough.
So, will market forces determine if Asas Serba’s proposal goes through? Or will other interests help nudge their ambitious plan into fruition, despite its inherent risks?
