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Little impact on Litrak earnings from MRT
Ng Wai Mun 
SPRINT carries tollable traffic of about 220,000 vehicles on weekdays
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Highway operator Lingkaran Trans Kota Holdings Bhd’s (Litrak) earnings are not expected to be adversely impacted by the Mass Rapid Transit (MRT) Sungai Buloh to Kajang line, which is now fully operational.

MRT phase one began operations in December last year, running from Sungai Buloh to Semantan. Phase Two, from Semantan to Kajang, started operations in July.

In a report, TA Securities research analyst Ooi Beng Hooi states he only expects limited negative impact, from the MRT’s existence, on the tollable traffic plying Litrak’s highways – Lebuhraya Damansara-Puchong (LDP) and SPRINT. The latter highway is managed by its associate Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd.

The analyst stresses that current public transport connections are still inadequate to result in a meaningful switch in mode of transport from private vehicles to public transport.

Ooi argues there is still room for improvement such as the friendliness of pedestrian infrastructure in terms of well-connected covered walkways and underpasses before we see any substantial migration from private vehicle to public transport as the preferred mode of commuting.

The research house also believes that any reduction in traffic as a result of the MRT will be offset by urban migration.

A research manager concurs. “The so-called last mile still has a long way to go. Last mile here means the travelling between the MRT stations and the final destination, be it your home, office or place of appointment,” she says.

She adds the situation is made worse as not every MRT station has a park-and-ride facility so one can drive to the station. “It is still not very convenient getting to the MRT stations via the feeder buses. These buses are not frequent enough and also the route taken is too long,” she says.

“Besides, the MRT only runs along part of Litrak’s highways, in particular SPRINT. SPRINT’s earnings (or losses) are overshadowed by the LDP’s earnings,” the research manager says.

She believes those who may give up driving for the MRT are those who live and work near the railway line. “Even then, that small group only accounts for a handful of the Klang Valley population,” she says.

Before opting for public transport, these commuters may have been using toll-free roads to bypass SPRINT in the first place. For some, she adds, using public transport may be more expensive than driving.

On who would be the biggest loser from the MRT’s advent, she says it may well be the KTM Komuter rail service, especially since the MRT also runs from the Sungai Buloh area. “Previously, the KTM Komuter was a popular mode of transport for office workers in the area to get into the city daily.”

 

Bigger concern

The research manager says a more pressing issue for Litrak is that the scheduled toll hike in January last year, which was deferred, would be its last toll hike until the end of its concession in August 2030.

It was to be a RM1 hike to RM3.10. The rate will then stay until the end of the concession period.

The government, however, decided to defer the toll hike. Class 1 vehicles, namely private cars, are still charged the old rate of RM2.10. Private cars are still the main type of vehicles using the LDP.

As a result of the deferment, the company has been receiving compensation from the government from January last year. In its latest annual report, Litrak said the government paid compensation amounting to RM90.7 mil in FY16 and RM171.2 mil in FY17.

Once the compensation stops, Litrak has the right to charge the RM3.10 as per the existing agreement. This potential toll increase should be met by a significant decline in tollable traffic volume, severely affecting earnings, the research manager says.

She says once the negative effect of this final hike settles, Litrak’s potential growth rate from then on will merely mirror the tollable traffic and/or population organic growth rate, of up to only 5% per annum.

There is to date no indication as to when the compensation will cease. However, there has been speculation that the government may review the compensation payments after the next general election.   

Litrak did not respond to FocusM’s queries for this article.

 

Drastic measures

The last time the highway operator raised the toll rates for the LDP was in October 2015 from RM1.60 to RM2.10 for private cars. As a result of the higher toll, the highway’s average weekday traffic fell by 3% to 478,000 vehicles in the financial year ended March 2017 from FY16’s 493,000 vehicles.

The full-year impact of the toll hike was first felt in FY17. 

The research manager foresees the possibility of Litrak’s management taking drastic measures by not exercising its option of charging the higher toll rate once the compensation ceases. “It is a matter of minimising the potential decline in traffic.

“Even if the final rate hike of 48% (from RM2.10 to RM3.10) is able to offset the reciprocated decline in traffic, resulting in a net increase in revenue, that is only one off. What happens after that?” she asks. 

The research manager stresses that the final increase will also be the highest, percentage-wise. No one can determine the magnitude of the fallout on the traffic volume. As per its 2017 annual report, a 1% change in the projected traffic volume for the remaining concession period will change Litrak’s pre-tax profit by RM1 mil.

The research manager says the uncertainty over where earnings growth will be coming from after Litrak starts charging RM3.10 has led to its share price hovering within a tight range of RM5.80 and RM6.10 since January. In contrast, the counter had been rising from RM3.60 in January 2015 to RM5 in January last year.

She says the focus is primarily on the LDP given its higher traffic volume. SPRINT only carries tollable traffic of about 220,000 vehicles on weekdays. Litrak is only able to equity account the profits from SPRINT, if any. The associate incurred a loss in FY17, of which Litrak’s share was RM5.4 mil. The loss was due to higher amortisation of certain expenditure and lower toll revenue.

“I do not dismiss the possibility of Litrak spinning off its stake in SPRINT if the price is right,” the research manager says.

“Even in FY16 when the associate recorded a profit, the contribution to Litrak’s bottom line was insignificant,” she says. Litrak’s share amounted to RM12 mil while the operator’s highway profit is in the region of RM220 mil per annum.

 

Hold recommendation

Litrak posted a 10% lower net profit of RM55.1 mil in the first quarter ended June 30, 2017. This was on the back of a 5% drop in revenue to RM129 mil. The management attributed the lower revenue to lower traffic volume on the LDP.

The management says should the government decide to pass on the full final toll increase to road users, one can expect a substantial drop in traffic volume on the LDP, affecting its revenue, like what occurred in October 2015 when toll rates were raised.

Ooi says the hold recommendation on the stock still stands, with an unchanged target price of RM6.26.



This article first appeared in Focus Malaysia Issue 250.