KEY INVESTMENT HIGHLIGHTS

• 1QFY21 earnings missed estimate, accounting only for 10% of our full year FY21 forecast and 11% of consensus estimate

• Revenue decline due to lower traffic volume following the enforcement of MCO during the quarter

• Lower cost during the quarter cushioned PBT

• We cut our revenue and earnings forecast for FY21-22

• Maintain Trading Buy with TP with unchanged at RM5.08 per share

1QFY21 net profit missed estimates. LITRAK reported a 1QFY21 net profit of RM27.2m (-60%yoy). This was recorded on the back of RM66.7m (-48%yoy) revenue for this quarter. Its earnings missed our estimate, accounting only for 10% of our full year FY21 earnings forecast and 11% of consensus earnings estimate. The negative deviation mainly came from lower traffic volume, approximately -85%, due the implementation of the movement restrictions by the government during last quarter period.

Lower cost cushioned PBT. PBT for the quarter was reported at RM36.1m (-49%qoq, -59%yoy) as compared to RM71.0m during the previous quarter, attributable to lower revenue recorded. Despite the contraction in LITRAK’s top line during the quarter (-48%yoy), the decrease in PBT was negated by: (i) lower amortisation of highway development expenditure arising from lower traffic volume; (ii) lower maintenance expense and; (iii) lower finance cost as the group manages to schedule repayment of bonds last quarter (PBT margin 4QFY20 is at 63% vs 54% for 1QFY21).

Long run outlook. Moving forward, the introduction of the unlimited monthly pass called My100 and My50 would encourage the use of public transportation. We see this as a downside risk on traffic volume. On a longer term, the completion of KVMRT Line 2 in 2022 which connects Sungai Buloh, Serdang and Putrajaya with the possibility of KVMRT Line 3 to be reinstated will also exacerbate the risk on tollable traffic volume. Specifically for SPRINT, the Damansara Link runs parallel to the stretch of KVMRT Line 1 from Semantan Station to Taman Tun Dr. Ismail station. We opine that the impact towards traffic volume will be more pronounced with the continuous improvement in public amenities and connectivity. Of the four stations competing directly with Damansara Link, Phileo Damansara and Pusat Damansara Station are equipped with park and ride facilities with over 500 car parking bays.

Earnings estimates. Following the lower-than-expected earnings recorded in 1QFY21, we are revising downwards our revenue forecast for FY21-22 to RM421m and RM505m respectively. Consequently, our FY21-22F earnings estimates have also been reduced to RM205m and RM254m respectively.

Target price. Despite revising our forecast, we maintain our TP at RM5.08. Our TP is based on the combined price tag of RM2.75b for both highway concessions (SPRINT and LDP) with slight discount to accomodate enlarged share base; on the assumptions of all employee share option schemes (ESOS) will be exercised upon government takeover.

Maintain Trading Buy. We are maintaining our Trading Buy recommendation on LITRAK pending cabinet’s decision on the highways’ takeover. As political climate is uncertain with small majority government, we foresee that the decision on the takeover will delay into CY21. Furthermore, with government resource is focuses on countercyclical policies to overcome Covid-19 induced economic decline, we opine that the decision on the takeover will be put on the back burner. That said, our house view is that should snap election be called in the near future, it will likely be announced post 2021 Budget due this coming November. Therefore, we opine that the decision on the highways’ takeover might come in sooner rather than later which might translate to near term price appreciation.

Furthermore, we reaffirm our view that the takeover offer by the government via Gamuda’s stake in SPRINT and LDP is appealing. The combined price tag of RM2.75b for both highway concessions translates to an effective offer price of RM5.08 per share (post enlarged share base assuming full conversion of ESOS) with a P/BV of 2.68x, a 29.5% premium to the current trading P/BV of 2.07x. Moreover, the anticipated offer price of RM5.08 per share constitutes a 24.2% upside to the last closing price of RM4.09 per share. LITRAK is also deemed a defensive play stock with dividends yield of 2.0% for FY21. Downside risk for LITRAK would be the cancellation of the takeover of its concession or a revised price tag which could fetch an unattractive valuation for shareholders. Remain TRADING BUY.

Source: MIDF Research - 28 Aug 2020