IT was just like yesterday that Gamuda Bhd’s deputy group managing director Mohammed Rashdan Yusof remembers just how close the company was to sealing the original four highway sale with the Pakatan Harapan (PH) government.
Phone calls were made and assurances were given that the plan would be a done deal. What neither party saw was the collapse of the PH government following the Sheraton Move.
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“I clearly remember the sale and purchase agreement was supposed to be signed in February 2020 and then we found out that Tun Dr Mahathir Mohamad had resigned (as Prime Minister of the PH government then),” Rashdan says.
The original deal also stumbled just as the ink dried on the terms of the purchase. There was broad disagreement from within the corridors of power of the PH government and that made progress on sealing the deal even more cumbersome.
In a way, that was a silver lining of sorts.
The deal was always on the back burner for Gamuda and as governments changed, the deal was nonetheless still pursued by Rashdan on behalf of the construction giant, and finally there was an agreement from all sides.
The government is now giving the takeover of the four existing highways its seal of approval after broad changes were made to the terms of the deal.
The current proposal that was announced by Works Minister Datuk Seri Fadillah Yusof looks similar on the surface to the original one as this takeover deal involves the same four highways that were offered to be taken over by the PH government.
Those highways are owned by Kesas Holdings Bhd, Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd (Sprint), Lingkaran Trans Kota Holdings Bhd (Litrak) and Projek Smart Holdings Sdn Bhd (Smart Tunnel).
But there are substantial differences that makes the deal more palatable to the current government.
Helping smoothen the acceptance is the fact that there is no recourse back to the government. That means the debt that is going to be issued does not appear in the balance sheet of the government.
Another key important difference is that the tolls will end once the highways are handed back to the government, compared with the first proposal where tolls will continue to pay for the maintenance of the four intracity highways.
Fadillah also points out that a key facet of the deal is that the government does not bear any risk in terms of the clause of an explicit government guarantee for the debt issued for this acquisition while no money is being spent by the government this time as well.
The icing on this deal is the fact that while the takeover will mean status quo in terms of toll rates for the revised duration of the concession, the government also stands to save a huge RM4.3bil in compensation it will pay to the concession owners of those four highways to keep tolls unchanged.
The latest deal has received the nod of the cabinet before it was made public with Prime Minister Datuk Seri Ismail Sabri Yaakob making the first announcement of the deal for the highways.
Learning from the past
One key takeaway from the deal is that the government of the day has learnt from the mistakes of the original PH deal that was met with swift condemnation from a number of politicians.
On the surface, there were similarities but tweaks were done given that one of the advisors to the PH deal as an investment banker is now the Minister of Finance.
The familiarity of the deal puts Datuk Seri Tengku Zafrul Abdul Aziz on sound ground to understand and tweak the terms of the current deal.
The government’s advisor to the current deal is AmInvestment Bank and it was CIMB, which was helmed by Zafrul, who then advised the government.
“The government goes through the figures very closely, which is why there is a difference in the takeover price tag now. The takeover figure then was RM6.2bil but it is now RM5.48bil – which is RM720mil less,” Rashdan says.
He points out that the difference is primarily due to the concession cashflows of two years’ difference between the valuation dates of the deal, the former in December 2019 whereas the current one being December 2021.
The equity payment amount is basically the same at RM2.3bil, which will be a big plus in obtaining shareholder approvals that will be sought for the sale of the highways to proceed.
Another arrow in the quiver of the deal is the credit rating that Amanat Lebuhraya Rakyat Bhd (ALR), the not-for-profit takeover vehicle for the four highways, will probably receive.
The bonds that will be issued in this leveraged buyout will probably have a AAA rating, the highest possible by the local credit rating agencies and that will act as a sweetener for existing bondholders to swap their existing debt, which carry a lower rating, for the new one to be issued by ALR.
“It will go through a typical book-building process and RM5.5bil will be raised and it is during this stage we will see the interested parties putting in their orders. We don’t think ALR is going to have any problems finding interested parties to invest in it,” Rashdan says.
“The other factor that would attract people to this sukuk is the strong environmental, social and governance (ESG) elements in it, which mainly focuses on the ‘S’ or the social element in ESG. “Because of this strong social component, the sukuk is given an equivalent of a gold medal for ESG by the rating agencies,” he adds.
As there is little to no political interference in this latest deal, with politicians from both sides of the divide having “signed off” on the deal, Rashdan thinks the entire deal could even be wrapped up by end May, based on more optimistic projections.
“I am actually quite confident it will go through and we are working very hard on this and are very hopeful for this outcome,” he says.
AAA-rated paper are always in high demand in Malaysia and with the “ESG” element attached to it, bondholders may find little reason not to subscribe for the new papers.
ALR would seek subscription from the usual suspects, established institutional debt capital market players such as the Employees Provident Fund, the Retirement Fund Inc, Lembaga Tabung Haji, insurance companies such as Great Eastern, AIA, Prudential, Eastspring and some of the banks.
In its report, CGS-CIMB believes the offer will be accepted as it provides closure to the long drawnout highway divestment scheme.
“Also, the Highway Trust model is deemed a win-win deal for Gamuda, the government and highway users over the long run,” the research house says.
Credit Suisse Research says the take over offer presents a good time for Gamuda to exit, as there are growing operational risks.
“Cash flow and earnings risk are on the rise. This is because there is greater uncertainty over compensation for delay in toll hikes, given the government’s fiscal constraints,” Credit Suisse says.
“The increase in government spending on development of public transport projects such as the Klang Valley Mass Rapid Transit could weigh on future usage of tollways,” it adds.
Interest rates also play an important part of the deal. With rates at a low level, the repayment profile also allows for the deal to be done within the schedule that is proposed. With the deal on a package-basis and harmonised to end on May 2032, there is ample room for the new RM5.5bil debt to be repaid.
“That is one of the reasons why we would like to get it done as soon as possible. When the sukuk rate is lower due to the AAA-rating status, the debt gets paid back much quicker as well,” Rashdan says.
The assumptions above are premised upon a base-case traffic volume compounded annual growth rate (CAGR) of 1.7% per year and it also implies that if traffic growth is higher than these estimates, then the sukuk will be fully repaid earlier than May 2032.
Nomura Research believes that a successful close to this deal will resolve long-standing pain points for the government, as well as the users of the toll road.
“For the users of these highways, there will be a freeze of toll rates and a possible early end of the tolling period.
Assuming the conservative 1.7% traffic CAGR, it has been estimated by management that highway bonds can be redeemed by 2032 and therefore the tolls can be abolished,” Nomura Research says.
What next for Gamuda?
Plans are already underway at Gamuda of what to do with the new capital that would come in once the conditions precedent are met and the deal goes through.
Gamuda’s share of the equity value at the four highways would see it gain RM2.33bil or at about 90 sen per share.
Part of these proceeds would almost certainly be redistributed to shareholders in the form of a special dividend while the group is projected to be in a net cash position of close to RM600mil after the deal, compared to a net debt position of RM1.7bil including a gearing of 0.2 times as at end of January 2022.
The extra cash will also help strengthen the balance sheet of Gamuda as it embraks on other capital-intensive projects in the years ahead.
“We will definitely consider a special dividend to reward shareholders and the Board shall decide in due course. But we will also need capital to grow the company in the future with the other projects that we would like to embark on,” Rashdan says.
CGS-CIMB notes that if 10%-30% of the RM2.3bil of new cash proceeds are earmarked for a potential special dividend, the special dividend payout could range from 18 sen to up to 27 sen per share.
Without the contribution from the highways earnings moving forward, Gamuda’s recurring earnings will drop by about RM170mil per year.
CGS-CIMB which had an “add” rating and a target price of RM4.25 says that Gamuda will have to forgo about 20%-35% of the financial year 2022 (FY22) – FY24 recurring net profit from its highway assets.
“However, the highway divestment will further enhance Gamuda’s war chest and provide sufficient headroom to redeploy capital elsewhere,” the research house says.
Rashdan says that the group will still be able to payout its dividend of the usual 12 sen per share every year, even without the recurring earnings contribution from its highways.
“We are confident that we will be able to replace these lost earnings (from the highways) by 2024 from the execution of new projects. We had recently also won some jobs in Australia and Singapore. There could be a few more tenders that we will clinch in the near term. We also got some jobs in Taiwan as well,” he says.
Future earnings would be driven by its project in Penang South Island, its involvement in the several Mass Rapid Transit Projects home and abroad, and also its projects in its property unit Gamuda Land.
“It is now harvest time in Gamuda Land - especially for the Cove and Gardens projects, as we have already laid the groundwork for several years earlier,” Rashdan says.
Other new areas that the Gamuda group would like to potentially venture into are to develop new green infrastructures including in the area of flood mitigation infrastructure and the development of large renewable energy production sources.
Rashdan hopes the renewable energy space would be able to replace its recurring earnings that would be lost when the highways are sold.
“It is not the way of the popularised large scale solar or LSS, this is a bit too small for us. We are looking instead at developing at least a few hundred megawatts from renewable energy sources such as solar and hydropower,” he notes.
Should the desired outcomes from this planned takeover be achieved eventually and the sale goes through, Gamuda would be in a firm balance sheet position to capitalise on any future opportunities that may come along.