Founded by Dato’ Sri Cheong Kong Fitt in 2008 and listed on Bursa in October 2016, Perak Transit Berhad (“Ptrans”) is a leading developer and operator of integrated transportation terminals and transportation service provider in Perak, Malaysia.

Since its listing, Ptrans has been recording consecutive years of profit growth, from RM22m to RM42m in FY2020. Despite the setbacks caused by the pandemic, the Group recorded the best annual profit in FY2020.

This article provides a detailed background of Ptrans’ business model, analysis of its financial track record, prospects forward, and our views on Ptrans as an investment target.

Ptrans operates in four business segments, namely:

1. Integrated public transportation terminal (“IPTT”) operations

Rental of advertising and promotional (“A&P”) spaces
Ptrans derives a significant portion of its revenue and profit from the rental of A&P spaces. The A&P spaces were leased to third-party companies for a fixed sum on an annual basis, where these third parties source for advertisers and end-users of these spaces.

Since 2015, the Group has been engaging Century Edge Group (“Century”) and Angkasa Aman (“Angkasa”) for the rental of A&P spaces. Century is responsible for organizing events and exhibitions at the terminals, while Angkasa takes charge of the advertising, branding, and/or marketing activities. So far, Century and Angkasa are the only two parties that lease from Ptrans.

Margin from this segment is above 80% as the operating expenditure required to maintain these spaces is minimal.

Rental of shops and kiosks
Ptrans also rents shops and kiosk spaces to third-party companies for a fixed sum on an annual basis.

Their tenants comprised of convenience stores, food & beverage, pharmacy, office space, budget hotel, apparel and accessories, home furnishing, etc.

Project facilitation
Ptrans leverages its experience and competency with terminal development, management, and operation to provide consultancy services to clients regarding terminal development/upgrade, management, and operation. Their scope of work covers:

• Preparing preliminary concept paper for the proposed development of IPTT;
• Design, planning, and procurement of approvals for the IPTT; and
• Meetings and discussions with The Land Public Transport Agency (“APAD”), Government officials, and local councils to facilitate IPTT construction and operations.

For this service, Ptrans typically charges its clients a percentage of the project development costs i.e. 2.5%. In FY2020, this division contributed RM39.5m in revenue from 6 projects, arriving at an average gross development cost of about RM263.3m for each project! (Can be considered a landmark if it was developed in rural areas)

Management was not willing to disclose name of projects in which they were involved over the years.

Profit-sharing from terminal management services (“TMS”) and others i.e. parking and taxi entrance fees
In 2020, Ptrans secured its first two TMS contracts with the local councils to manage Terminal Sentral Kuantan and Terminal Shahab Perdana. Further details on the arrangement can be referred to the section on “Corporate Updates”.

To-date, the Group has developed (self-owned) and is currently operating 2 IPTTs in Perak i.e. Terminal Meru Raya and Terminal Kampar Putra.

2. Public stage bus, express bus, bus chartering and bus advertising services

Ptrans owns a total fleet size of 152 buses, with stage buses comprising 70% of its bus portfolio. This division contributes consistent revenue to the Group annually, in between RM25m – RM35m p.a. Profitability wise, only marginal margins are achievable given the nature of the industry.

Stage/City bus services
The stage bus service provides short-distance transportation within/between districts in Perak to serve the local community, including rural areas.

Two different agreements with the Federal Government of Malaysia (“GOM”), where the Group either receives a subsidy on operation cost for loss-making routes (interim stage bus support fund) or the GOM would provide grants based on the distance covered by Ptrans’ buses (cost/km run) (stage bus services transformation program).

Both models rely on GOM’s support to remain operational. On the bright side of things, it provides certainty to the Group in terms of revenue/income. For example, for the stage bus services transformation program, Ptrans’ revenue/income is mainly from receipt of GOM grants calculated based on distance traveled during the period. A low ridership or passenger load factor does not impact Ptrans’ revenue/income.

Express bus services
The express bus service provides transportation for routes >32km. The segment derives income from ticket sales to passengers. No GOM subsidy or grants are provided for the segment. The fare rates of express bus service are set out by the APAD and any fare revisions are subject to APAD’s approval.

Management is selective at only picking profitable routes i.e. trips to Lumut, Taiping, Kuala Lumpur, and Cameron, etc. They avoid distant journeys such as to Singapore, Kelantan, and Terengganu, etc. Profitable routes are generally those with high frequent demand and shorter distances.

Bus chartering
The Group operates bus chartering services to the public and private sectors. They normally charge a fixed fee over a period for bus chartering, not dependent on the number of passengers. The Group currently has an ongoing contract with the local council of Perak to promote tourism via the “Hop-on, Hop-off” buses.

3. Petrol stations operations

The Group currently operates four petrol stations, comprising Shell stations at Lahat and Tanjung Rambutan, a BHP station at Terminal Meru Raya, and a Petron station at Lubok Merbau, all of which are in Perak.

Management indicated that the operation of petrol stations is mainly supplementary to its bus operations. Despite contributing about 20% of the Group’s revenue, this division barely makes a profit with its margin being less than 2%. The management has no plans to further expand its petrol station operations.

4. Mining management

During FY2020, the Group has entered into a Joint Venture Agreement (“JVA”) with a third party, Gemas Perunding Sdn Bhd (“Gemas”) to undertake the business of mining limestone and silica sand (“Resources”) in Perak. The JVA is for 5 years with Ptrans being responsible for providing project management services and identifying, negotiating, and securing buyers.

The JVA was set up with a paid-up of RM2mil, of which RM600k is borne by Ptrans. Ptrans enjoys a share of the JV profit at an agreed ratio of 70:30. The mining site size is about 73 acres, located at Mukim Teja with a projected operational life of limestone of about 80 years (at full depth).

Key risks of the venture include the termination risk of contract and mining rights and the risk of execution and delivery as we have limited information on the track record of Gemas & Ptrans in this business.

In FY2020, Ptrans recognized RM27.5k in revenue and a net loss of RM85.7k from this division.

In FY2020, the revenue contribution from operating IPTTs, public transport, petrol stations and mining management are RM71m (59.4%), RM26m (21.4%), RM23m (19.2%) and RM27k respectively. In terms of profit before tax, the contribution from respective segments is RM47m (95%), RM3m, RM783k and loss of RM85k.

MANAGEMENT TEAM

Dato’ Sri Cheong Kong Fitt (“Dato Sri”), aged 61 is the founder and current Managing Director of the Group. He has over 25 years of experience in the public bus terminal operations. He started his venture in 1992 with The Combined Bus Services (Partnership) as a supervisor responsible for managing bus terminal operations. Looking at his success today, the rest of his background is history.

Dato’ Sri is assisted by his brother, Dato’ Cheong Peak Sooi, aged 54 who had held the position as the Group’s Executive Director for the past decade.

Other key management staff includes:

• Jennifer Chin Yi Teng, aged 33, the Chief Financial Officer of the Group. She joined the Group in 2012.
• Narendran A/L Murgayai, aged 42 is the technical manager of the Group. He joined the Group in 2017. Prior to joining the Group, Narendran manage daily operations of shopping malls including car park department for a Lion Ipoh Parade Sdn Bhd.
• Boon Sin Khoon, aged 54 leading the Bus Operation of the Group joined since 2018. Mr. Boon bring with him wealth of experience in the logistics industry of more than 20 years.

GROWING PROFITS | IMPROVED FINANCIAL POSITION

Since FY2016, Ptrans business has grown steadily over the years with its FY2020 revenue and net profit closing at a 4-year CAGR of 7.3% and 18.0% respectively. Performance during FY2020 was slightly impacted by the lockdowns imposed. Nonetheless, they recorded the best year profit of RM41.8m in FY2020.

Net margin trend of the business has been increasing steadily from 23.9% in FY2016 to 35.0% in FY2020 due to improved contributions from the rental of A&P spaces and project facilitation.

Based on revenue breakdown, we would note that Ptrans’ growth over the years has been mainly contributed by its IPTT operations. Within IPTT operations, growth from project facilitation was the outlier for the past 4 years. Contribution from rental income declined from a share of 53% in FY2017 to 44% in FY2020.

Ptrans generally enjoys a lower effective tax rate as capital investments for the development of IPTT are considered as an approved service project. An investment allowance of 60% qualified capital expenditure can be utilized against 70% of statutory income derived from the respective IPTT. As of December 2020, the Group has a remaining unutilized investment allowance of RM182m. For the past 5 years, Ptrans’ effective tax rate ranged between 2% – 14% only.

The business generates healthy CFO over the years, with its average CFO to Net Income ratio maintained above 1.0x. However, due to the requirement of significant capital investments for the development of IPTT, the Group has over the years been operating with a deficit FCF.

For the past 5 years, the Group invested a total capital expenditure (“CAPEX”) of RM405.0m for the upgrade and development of its terminals. Fundings were raised via internally generated funds, Sukuk proceeds, and capital raising exercise (private placement and exercise of warrants).

For the next few years, we expect the Group’s cash flow to be in a similar fashion as they plan to develop two additional IPTT. The development cost for Terminal Bidor is estimated at about RM100m, and to be funded via internally generated funds and issuance of the remaining RM200m Sukuk.

Ptrans’ debt has been increasing rather quickly, from a gearing level of 0.6x in FY2016 to 0.9x in FY2019. Nevertheless, comfort is drawn on the Group’s healthy interest coverage ratio of >5.0x. This is backed by the fact that a significant portion of the Group’s income is secured from fixed rental income from shops, kiosks, A&P, and GOM grant/subsidy on its bus operations.

During FY2020, we note a decline in the Group’s debt by RM75m as funds raised from the conversion of warrants were partially used for repayment of a portion of the Sukuk.

LATEST QUARTER FINANCIAL RESULTS (JAN – MAR 2021)

Compared with the preceding year’s corresponding quarter, the increase in revenue and profit in 1Q2021 were due to higher rental income the leasing of shops and A&P spaces at Kampar Putra Sentral (started in September 2020). The higher recognition of project facilitation fees from two ongoing projects further contributed to the increase in revenue and profits.

The increase was sufficient to offset the drop in bus and petrol station operations that were impacted by the MCO 2.0.

In comparison to the immediate preceding quarter, the Group’s revenue and profit did not change much.

CORPORATE UPDATES

• Construction of the Group’s 3rd IPTT in Bidor is expected to commence in 2H2021, with the target to complete by end-2023. The terminal will be constructed on 4.9 acres of land, already acquired by Ptrans. Bidor was selected for several factors, including:
  1. The decision by the local council to close two existing terminals in Tapah & Bidor;
  2. The strategic location of Bidor as an important turn off from North-South Expressway to reach the coastal district of southern and central Perak; and
  3. Vicinity to a university and Kossan Rubber Industries Berhad’s new mega site in Bidor (Kossan is currently developing its new manufacturing site in Bidor, spanning 333.4ha of land. The development will be developed over 8 years (up to ~2029) with the first plant to complete in 2022.)

• Management has a plan to develop its 4th IPTT in Tronoh. Tronoh is known as the University town, where the Universiti Teknologi Petronas and Universiti Teknologi MARA are located. Ptrans has acquired 16.6 acres of land for this development and the construction would start only after the completion of Terminal Bidor. Nevertheless, the plan remains preliminary at this stage.

• Rental contracts with Century and Angkasa have been renewed and extended up to 31 March 2022, with no change to the contract sum. This provides predictability to the Group’s income for the rest of FY2021.

• The management is exploring transforming idle commercial spaces at its existing terminals into logistic hubs. The Group is in preliminary discussions with logistic players on this latest development. There is a strong demand from logistic players for a strategic space to meet warehousing, fulfillment, and delivery requirements.

• Ptrans’ order books on-hand in relation to project facilitation would last them till the end of FY2021. They expect a sustainable contribution from this segment, at least for the next 2 years as they see the opportunity to grow their market share in this segment.

• In January 2021, the Group marked its first venture into TMS and operation of IPTT outside of Perak, with the collaboration to operate Terminal Sentral Kuantan.
  
  The 9-year contract to manage the Terminal starts from 1 February 2021 – 31 January 2030. Ptrans will be investing RM3.5m to refurbish and upgrade the Terminal for its client. In return, the contract secures Ptrans a fixed management fee of RM1.2m p.a. for the next 9 years, subject to a minimum of 3% annual increment.

• In February 2021, the Group secured its 2nd TMS contract for Terminal Bus Shahab Perdana. The contract has a 15 years tenure, starting from 1 April 2022 or earlier, depending on the completion of renovation work. Ptrans is allocating an initial investment of RM6.5m to refurbish and upgrade the Terminal. In return, Ptrans is remunerated based on the income the Group derives from renting and leasing the Terminal commercial areas.

• Bus operations are expected to decline in the next quarter following the implementation of lockdowns and travel restrictions across districts and states.
  
  Management has plans to convert several express buses to stage/city buses. The conversion would ensure a steadier income for the Group, allowing them to better manage the profitability of the division.

KEY STRENGTHS

• A healthy portion of the Group’s income can be considered as recurring and secured i.e. rental of shop and A&P spaces, GOM grant/subsidy for stage bus services, and terminal management services. Risk of rent collection, uncertainty/difficulty with leasing, and operating loss for running bus services can be considered as fully mitigated.

• Strong balance sheet position with an interest coverage ratio of >5x. Cash flow generated from operations has been consistent and healthy. The Group recently formalized its dividend payout ratio of not less than 35% of net profit. At the current price, we are looking at a dividend yield of about 4% p.a.

• The Group would be emphasizing the growth of its TMS moving forward, with a target to close FY2021 with another 2 – 3 contracts. The TMS model provides the Group with an additional source of stable income, at a shorter payback. The requirement for initial investment (<RM10m) is significantly lower as compared to the development of IPTT.
  
  Visible growth prospects with close to a hundred terminals in Peninsular which Ptrans can tap for years to come.

• Monopoly position when it comes to its control over bus traffic in Perak. All express buses are mandated to transit at Terminal Meru Raya as gazetted by the local council. This guarantees a healthy and consistent footfall at Ptrans’ main terminal, providing them bargaining power to sustain its rental rate to third parties.

• High barrier of entry given the significant capital outlay required for the development of IPTT and the nature of the strict regulations. Competition risk can be disregarded as every location (within a specified distance) would not exist more than one IPTT. The State government/district council would have designated in its Masterplan a specified location in each area for an IPTT.
  
  Furthermore, a good track record in managing an IPTT and close ties with the local council are must-haves for new entrants looking to venture into this industry.

• Experienced management team led by Dato’ Sri, an industry veteran and a well-known figure in Perak for his contribution to the state’s transportation infrastructure. Award to Terminal Meru Raya as a “Grade A” IPTT further proved the team’s execution in managing an IPTT.

KEY RISKS FOR CONSIDERATION

• In the near term, the extended lockdown is expected to have a direct impact on Ptrans’ bus (shorter operating hours) and petrol stations operations (lower overall consumption). In addition, rental rebates which the Group may provide to its tenants, during the period of lockdown may also result in a decline in income. Having said that, we expect the impact to be manageable given the Management had had experience with the previous MCOs.

• Project facilitation contracts are non-recurring in nature. Failure to replenish the order book would cause a relatively big impact on the Group’s bottom-line, looking at its growing significance quarter on quarter. With the limited information available on this division, we are unable to fully assess its prospects and risks. A consultation fee of 2.5% over the total development cost seems unsustainable. Too good to be true?

• Ptrans’ business model requires significant capital investment. The Group is not expected to generate a surplus in FCF for as long as they have plans for development of new terminals. Slight comfort drawn as the Group generates healthy and secured income from rentals of shops and A&P spaces. Further, interest coverage for the past few years has been consistently above 5.0x.

• Adverse changes with the GOM’s subsidy/grant program would significantly impact on the viability of Ptrans’ bus division. Having said that, we opine chances for change with the program are remote, given the importance of bus services to the community and commitment by the GOM/council on public transportation infrastructure and services. Several changes with the governing coalition in recent years have not resulted in any adverse change to the program thus far.

MAJOR SHAREHOLDERS AS AT 31 MARCH 2021

Dato’ Sri Cheong Kong Fitt being the Founder of the Group together with his spouse, Datin Sri Lim Sow Keng holds a total of approximately 30.3% in the Group. His brother, Dato’ Cheong Peak Sooi holds 1.0% in the Group.

There are several notable institutional investors i.e. Philip Capital Management (5.0%), Retirement Fund (KWAP) (2.4%), Kenanga Funds (4.0%), Maybank Small Cap Fund (1.5%), Tokio Marine Life (1.7%) and Great Eastern Takaful (0.7%).

Mr Koh Kin Lip, a prominent value investor also holds a significant stake in Ptrans totaling 3.2%.

PEER COMPARISON

We consider Ptrans to have no comparable peers in its industry at the time of writing.

VALUATION ESTIMATES

For the past 5 years, Ptrans’ price-to-earnings (“P/E”) and price-to-book (“P/B”) valuation ranged as follows:

In consideration of Ptrans’ business model, track record, growth prospect, and its key business risks, we analyze Ptrans’ valuation based on multiple applicable models. The following is our assumptions and estimates for each valuation model for guidance:

• P/E between 8x – 12x. Refer as below.
• P/B between 0.8x – 1.2x (We see a similarity to a REIT) would price its share between RM0.60 – RM0.90.
• Discounted cash flow model (“DCF”) – Initial 5-year growth of 5% – 10% p.a.; Terminal growth at 2% p.a.; Discount rate at 10% (conservatively). Ptrans’ valuation would range between RM1.14 – RM1.40.

On 27 May 2021, 4 analysts have also issued their respective target prices, as follows:

At RM0.69, Ptrans is currently valued at 8.8x PE multiple (based on base-case estimates) and about 0.9x PB ratio.

Overall, we favor the Group’s business model, prospects, and the various key strengths as mentioned above. However, being aware and cautious of the several risks, we are particularly uneasy about the Group’s project facilitation division. Management’s reluctance to share information about past and existing projects did not help with answering our doubts about the division.

At the current risk to reward ratio, we would remain patient to only consider initiating a position when an opportunity arises (e.g. 10% margin of safety). Meanwhile, we continue to monitor the Group’s performance and to gather/seek more information with regard to its project facilitation business.