Sunday, 31 August 2014

I think KEURO is cheap and safe

I perform 2 tests before deciding whether to invest in a listed company. Firstly, whether it is in the right business with good prospects. Secondly, whether the price is right.

KEURO has 80% stake in West Cost Expressway (WCE) concession. It is a 233km long highway with concession period of not less than 50 years. Upon completion of the highway, the concessionaire will be the third largest highway concessionaire in Malaysia, after PLUS and ANIH Berhad.

I think WCE will be doing well, given:

1. Well connected to various existing expressway:
Federal Highway, KESAS, SKVE, NKVE, NNKSB, LATAR and LKSA etc

2. Safer route to coastal areas and avoid mountainous terrain in Jelapang – Kuala Kangsar area. Less fuel consumption and can avoid the annoying speed breakers after Menora tunnel as well

3. Cheaper toll expense:
For a total length of 316km, 83km of the West Coast Expressway will be toll free, much longer compared to the toll-free stretch between Jelapang and Ipoh Selatan on North-South Expressway. So if the toll-rates for both the expressway are comparable, travelling from areas such as Shah Alam, Klang, Subang, KLIA to Taiping or further North is likely to be cheaper in term of toll expense. For those travelling to/from Southern region of Peninsular Malaysia, it is well-connected to ELITE too via SKVE.

4. Traffic flow supported by several completed and ongoing townships such as Setia Alam, Bukit Raja, Bandar Botanic, Bukit Tinggi, Canary Garden, Kota Kemuning, Bandar Puteri, USJ, Subang Jaya, Shah Alam, Pantai Sepang Putra, Putrajaya, Cyberjaya, Dengkil as well as towns along the expressway such as Banting, Klang, Kuala Selangor, Teluk Intan, Setiawan, Manjung. Note the presence of Ecoworld, Gamuda, Tropicana in the Southern corridor.

5. Less threat from double track ERL by KTM as compared to North-South Expressway as the alignment of the double track is closer to the alignment of North-South Expressway

The concessionaire is investing RM6b in this highway. Based on 20:80 equity:debt financing, the concessionaire is injecting RM1.2b of equity investment into the highway. Based on my rough calculation, after deducting KEURO's 40% stake in Radiant Pillar (developer of Rimbayu township) and remaining stake in Talam, at RM1.13 per KEURO share, investors are investing into WCE at a discount to the equity investment of RM1.2b.

Besides, IJM-KEURO has been appointed as the turnkey contractor for WCE. The turnkey contractor will earn some fee over the construction cost of the WCE. To me, this is just an accounting profit but during the construction period, KEURO is likely to be profitable, also boosted by earnings from Rimbayu development.

WCE is divided into 3 phases. It is expected to achieve overall completion by 25 August 2019. The good news is that the highway will be open to public when it achieves sectional completion. The first section, a section with high traffic volume in Selangor section, is expected to start collecting toll in 3-4 years' time.

KEURO has warrants with exercise price of RM1.18 and validity of 2 years. The proceeds raised from the warrant conversion is to be utilised to partially fund the development of WCE. I believe the share price of KEURO will have some premium over the exercise price of RM1.18 near the expiry of the warrants to entice warrant holders to exercise their warrants. Else, the company may need to do something else to get the further funding for WCE. At share price of RM1.13, this may give better return than putting money in fixed deposit.

It will take a few years before WCE starts generating toll revenue but I am already a bit excited over its prospects given the encouraging maturing of the Southern corridor of Klang Valley.

KEURO is unlikely a stock for those who want to seek quick gain and thrill in share price fluctuation, but I believe long term investors in this stock will be well-rewarded.

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