This can be considered a supplemental article on my past and present articles on Triplc. As now the fate of Puncak and Triplc is intertwined due to the proposed disposal of business from Triplc to Puncak, this article is just to examine what Puncak stands to get from the deal as I don't think most people understand and appreciate the value of Triplc. Just to be clear, I won’t  be giving any target price or recommendation on Puncak so if you can either discern it yourself through this article or walk away if not interested.

For the past year, I have written extensively on Triplc so if you are interested to know more about the company, I believe these articles below would provide some useful info.

Triplc Part 1:Why Triplc is too cheap to ignore and Puncak Niaga's role in unlocking its value

http://klse.i3investor.com/blogs/purelysharing/95049.jsp

Triplc Part 2: Time to position yourself; Preliminary target price RM2.85-RM3.20

http://klse.i3investor.com/blogs/purelysharing/100959.jsp

Triplc Part 3: Is it still worth the wait?

http://klse.i3investor.com/blogs/purelysharing/102783.jsp

Triplc Part 4: Not the most ideal outcome

http://klse.i3investor.com/blogs/purelysharing/112325.jsp

Utilisation of cashpile

As you should know, Puncak will be acquiring Triplc entire biz for RM210m cash. I know a lot of investors previously invested in Puncak for its high net cash so this deal will potentially be another dent on its cashpile after the plantation acquisition. The 2 acquisitions will take out around RM650m cash, plus cash probably set aside for planting, the cashpile is dwindling fast.

But this should at least be expected to a certain extent. After all, Puncak has no real significant biz and is bleeding financially. Acquisitions are to at least get the company back on its feet.

So what Puncak stands to get

Puncak will get:

1) One running concessions Z1P2 (obligations fulfilled, now just receiving RM42m fixed payment every year)

2) One upcoming construction/concession Z1P3 (RM599m contract awarded, financing all in place)

3) One running maintenance contract for Z1P2 (currently around RM6m annual profit after paying interest)

4) One future maintenance contract for Z1P3 after the construction finishes

5) Significant size of land bank in Selangor areas (about 380 acres) and Negeri Sembilan (industrial 50 acres), total land plus some properties valued at RM258m

6) Triplc brand name and track record in university concessions bidding (Triplc has completed more than RM1b construction works over the years)

7) Concession borrowings ~RM230m, non-concession borrowings ~RM70m, new concession borrowings up to RM640m to finance the RM599m construction contract)

Is it a good deal for Puncak?

If I may quote my latest Triplc article:

 “But from face value alone, the valuation does seem to be a bit too low. RM258m land – RM73m borrowings (exclude MTN) would have been RM185m excluding concession biz. If you take the cash balance as non-concession related, then net borrowings for non-concession is almost zero. That would mean, based on valuer’s fair value of RM191m to RM230m, the concession biz are valued at a paltry sum of RM6m to RM45m. Z1P2 alone Puncak stands to receive RM42m x at least 18 more years = ~RM760m. Even with borrowings plus interest say RM300m, it’s still dirt cheap to pay less than RM50m to get RM460m in the next 18 years plus every year maintenance income.

Even when you compare to a recent transaction by Bintai Kinden, they bought a university concession which has RM120m contract value, annual payment RM12m for 22 years. The valuer valued it as RM24m-RM27m, actual transaction price at a discount RM15m. Even if you use RM15m for RM120m, RM599m contract should be at least worth RM75m while Z1P2 completed contract should also be worth easily RM15-RM20m. Combined plus the RM185m land with borrowings would be closer to RM280m. Which makes me really curious and I would like to see how the valuer actually values the whole company. I think it’s artificially pressed down.

Besides, after this deal, PEB won’t be able to use the Triplc track record to bid for future university concession projects (Rozali won’t let it cannibalise Puncak). So they lose their construction and concession biz as well as all its land bank and track record for RM210m, Puncak could have made a better offer.”

So yes, I do think that the deal was tilted towards the favour of Puncak.

Financial impact

Profitability

Puncak will make huge profit in the first quarter after the deal is completed. Yes I’m not kidding. Because there will be a one-off negative goodwill to be recognised. Triplc net asset stood at RM174m, now with the land revaluation (RM258m market value vs RM68m net book value) net of deferred tax, the net asset will be revised significantly upwards by ~RM145m to ~RM320m, which means with the payment consideration of RM210m, there is a potential negative goodwill of RM110m. This is huge compared to Puncak’s market cap of ~RM450m.

For sustainable earnings, Z1P2 maintenance contract is currently providing ~RM6m annual net profit. Z1P3, which is poised to start now that financing is in place, is estimated conservatively to provide ~RM130m net profit over the next 3 years. Which means Puncak will probably reap ~RM45m net profit per annum for the next 3 years, all these with the interest cost taken care of (for those who are concerned with the large amount of borrowings). RM45m will translate to ~10c EPS for Puncak. This will nicely set off all the losses from the existing operations (excluding one-off items) and any initial losses from the plantation biz. If things happen on track, by the time Z1P3 contract is finished, there will still be 2 maintenance contracts and plantation biz should start to bear fruit. This will allow Puncak shareholders to say goodbye to the persistent losses.

Balance sheet

The big additions here will be the land, cash and borrowings. There will be a huge addition of RM258m worth of land plus some properties. Based on the latest results, cash balance ~RM70m, concession borrowings around ~RM230m, non-concession ~RM70m. Subsequent to the quarter, Triplc also secured a sukuk facility up to RM640m to finance the construction contract which they will issue in tranches.

Land value is good but is the high gearing a concern? Yes and no. We should always be concerned with high gearing because if something goes haywire, the company is still saddled with debt obligations. However taking a closer look, non-concession borrowings net of cash is almost zero. For concession borrowings, these are secured against the concession. Even better than highway concessions which is subject to traffic volume variance, these university concessions have guaranteed payment by government. And all the interest and principal repayments are structured based on the timing in which government pays Triplc. It wouldn’t be too exaggerating to say the only significant risk for Triplc and its concession sukuk holders will be if our government defaults.

Cashflow

Z1P2 will provide RM42m guaranteed annual payment on top of the maintenance income. However most of the cashflow will be used to repay debts so initial years free cashflow is likely to be modest. Besides, Z1P3 will not receive any cash inflow for first 3 years (fully debt-financed), so that would be a drag on cashflow. However, all sukuk payments are structured nicely based on cashflow timing. Essentially, Triplc will use debtholders cash to bankrolled the construction for first 3 years, and subsequently get the cash back from government to repay the debtholders and pocket the rest. Besides, cashflow is not a big issue for Puncak. In fact it has too much cash but too little earnings.

Conclusion

Overall, I think Puncak shareholders may have misunderstood Triplc and its values. Just because it’s related party transaction, doesn’t mean it cannot be of good value. In fact, I think there’s a higher chance for Triplc shareholders to reject the deal than Puncak shareholders since Triplc require 75% shareholders’ approval. Puncak shareholders also stand to lose more if the deal is rejected as it will revert back to the sleeping giant and continue to bleed losses while Triplc shareholders can at least look forward to the 3-years earnings upcycle from Z1P3.

Anyway, it will be interesting to see the developments in the coming EGMs for the 2 companies.