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PP 7767/09/2010(025354)

22 March 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
22 March 2010
MARKET DATELINE

Infrastructure Recom : Neutral


(Maintained)
IFRIC 12 To Hit NTA And Earnings Of Concessionaires

Table 1 : Infrastructure Sector Valuations


Price Fair EPS EPS growth PER P/NTA P/CF GDY
FYE Value (sen) (%) (x) (x) (x) (%) Rec
RM/s RM/s FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
PLUS Dec 3.37 4.13 23.6 36.3 -0.3 53.5 14.3 9.3 2.8 8.6 5.3 OP
Puncak Dec 2.43 2.95 31.1 28.8 -10.4 -7.4 7.8 8.4 0.7 2.3 2.5 MP
Sector Avg -1.4 48.2 13.6 9.2

♦ Background. IFRIC 12 - Service Concession Agreements, which covers Chart 1: PE Band For PLUS
the accounting treatment of service concession agreements in the financial
statements of the operator, is targeted to take effect in Malaysia from 1 Jul PER = 15x
PER = 13x
2010. PER = 11x

♦ Two major impacts of IFRIC 12 on concessionaires. We reckon that


the implementation of IFRIC 12 will impact concessionaires under RHBRI’s
infrastructure sector (i.e. PLUS Expressways and Puncak Niaga) in two
major aspects, i.e.:

1. Concessionaires can no longer recognise concession assets as tangible


Chart 2. PE Band For Puncak
assets, which means the reclassification of PLUS and Puncak Niaga’s
concession assets from tangible assets to intangible assets in its
balance sheet will turn their net tangible assets (NTAs) into the
PER = 25x
negatives; and PER = 20x
PER = 15x
2. Concessionaires that are currently amortising concession assets using
revenue method will have to switch to either straight line or use of
volume method. Based on our estimates, the change in amortisation
method (either use of volume or straight line method) will result in
higher amortisation expense and hence lower earnings.

♦ Earnings forecast. Maintained for now, as: (1) We are still unsure as to
the new amortisation method that will be adopted; and (2) The migration
into IFRIC 12 may be delayed further, given that several issues arising
from the change in accounting treatment have yet to resolve. In any case,
this is nonetheless accounting entry and it will not affect our DCF-derived
indicative fair value on these companies.

♦ Investment case. IFRIC 12 aside, we continue to like PLUS (OP, FV =


RM4.13) for its defensive earnings growth and decent dividend yield of 5-
6% per annum. Also, investors may be in for a windfall if the rumoured
privatisation materialises at a high price. As for Puncak (MP, FV =
RM2.95), we continue to believe that the water sector restructuring in
Selangor by the Federal Government is unlikely to materialise any time
soon, as the state’s water sector restructuring will involve negotiation with
several parties (including Selangor state government and water
concessionaires). Maintain Neutral on the infrastructure sector. Chye Wen Fei
(603) 92802172
Please read important disclosures at the end of this report.
chye.wen.fei@rhb.com.my

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22 March 2010

Impact on IFRIC 12

♦ Background. IFRIC 12 - Service Concession Agreements, which covers accounting treatment of service
concession agreements (such as “service concession”, build-operate-transfer” and “rehabilitate-operate-transfer”
arrangements) in the financial statements of the operator, is targeted to take effect in Malaysia from 1 Jul 2010.
According to our sources, affected companies (in particular concessionaires) are likely to migrate into this new
accounting practice by the immediate following financial year-end.

♦ Two major impacts of IFRIC 12 on concessionaires. We reckon that IFRIC 12 will impact concessionaires
under RHBRI’s infrastructure sector (i.e. PLUS Expressways and Puncak Niaga) in two major aspects, i.e.:

1. Concessionaires can no longer recognise concession assets as tangible assets because the they do not
control the use of the infrastructure, they have only the right to operate the infrastructure. This will result in
a reclassification of concession assets from tangible assets to either financial assets, intangible assets, or a
mixture of both (see Table 2); and

Table 2: Summary on Nature of Asset to be Recognised


Operator’s Rights Classification Examples
Unconditional, contractual right to receive cash or other Financial asset • Operator receives a fixed amount from the
financial asset from or at the direction of the grantor. grantor over the term of the arrangement.
• Operator has a right to charge users over the
term of the arrangement, but any shortfall will
be reimbursed by the grantor.
Contractual right to charge based on usage of the services. Intangible asset • Operator has a right to charge users over the
Amounts to be received are contingent on the extent that term of the arrangement.
the public uses the service. • Operator has a right to charge the grantor based
on usage of the services over the term of the
arrangement.
Consideration received partly in the form of financial asset Financial & • Operator receives a fixed amount from the
and partly in the form of an intangible asset intangible asset grantor and a right to charge users over the
term of the arrangement.
Source: www.iasplus.com

2. Concessionaires that are currently amortising concession assets using revenue method will have to switch to
either straight line or use of volume method, which will potentially result in higher amortisation charges (and
hence lower reported earnings).

♦ PLUS and Puncak will become negative NTA companies. The reclassification of the concession assets of
PLUS and Puncak Niaga from tangible assets to intangible assets in its balance sheet will turn their net tangible
assets (NTAs) into the negative (see Table 3).

Table 3: Impact on PLUS and Puncak Niaga’s NTA


As at 31 Dec 09 Upon Implementation of
(RMm) IFRIC 12
(RMm)
PLUS Expressways 6,074.9 (6,342.6) Runs into risk of being
classified as a PN17 company
Puncak Niaga 958.7 (805.6)
Source: RHBRI

♦ Higher amortisation expenses. Also, under the IFRIC 12, both PLUS and Puncak will migrate to a new
amortisation method, i.e. either: (1) Use of volume method; or (2) Straight-line method upon migrating into
IFRIC 12. This is mainly because the revenue method, which being adopted by PLUS and Puncak is no longer
applicable. Based on our estimates, the change in amortisation method (either use of volume or straight line
method) will result in higher amortisation expense and hence lower earnings (see Tables 4-5).

Table 4: Earnings Impact on PLUS Expressways


Amortisation Method
Revenue Method Use of Volume Straight Line Change
(RMm) (RMm) (RMm)
FY12/10 Depreciation & Amortisation 383.9 489.2 425.7 +10.9-27.4%
FY12/10 Net Profit 1,181.9 1,103.0 1,140.1 -3.5-6.7%
Source: RHBRI

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Table 5: Earnings Impact on Puncak Niaga


Amortisation Method
Revenue Method Use of Volume Straight Line Change
(RMm) (RMm) (RMm)
FY12/10 Amortisation expenses 464.4 487.5 511.6 +5.0-10.2%
FY12/10 Net Profit 127.8 104.6 80.5 -18.1-37.0%
Source: RHBRI

Earnings Forecasts

♦ Earnings forecasts. Maintained for now, as:

1. We are still unsure as to the new amortisation method that will be adopted; and

2. The migration into IFRIC 12 may be delayed further, given that several issues arising from the change in
accounting treatment have yet to resolve.

♦ In any case, this is nonetheless accounting entry and it will not affect our DCF-derived indicative fair value on
these companies.

Risks

♦ Risks for toll road sector. The risks include: (1) FY12/10 traffic volume growth rate of PLUS’s core
expressways coming in below our assumption of 3.0% respectively. Ceteris paribus, our sensitivity analysis
indicates that PLUS’s DCF-derived NPV and FY12/10 earnings will fall by 2.4% and 1.8% for every 1%-pt
shortfall to our FY12/10 traffic volume growth assumption; (2) Higher-than-expected maintenance cost; and (3)
Operating risks in overseas ventures (in particular, Indonesia and India).

♦ Risks for water sector. The risks include: (1) Compensation arising from delayed 37% scheduled tariff 37% is
paid; (2) 37% scheduled tariff hike is granted; (3) Lower-than-expected variable costs, in particular, chemical
costs; and (4) Water sector restructuring completes earlier-than-expected.

Sector Rating

♦ Investment case. IFRIC 12 aside, we continue to like PLUS (OP, FV = RM4.13) for its defensive earnings
growth and decent dividend yield of 5-6% per annum. Also, investors may be in for a windfall if the rumoured
privatisation materialises at a high price. As for Puncak (MP, FV = RM2.95), we continue to believe that the
water sector restructuring in Selangor by the Federal Government is unlikely to materialise any time soon, as
the state’s water sector restructuring will involve negotiation with several parties (including Selangor state
government and water concessionaires). Maintain Neutral on the infrastructure sector.

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22 March 2010

Chart 3: Puncak Technical View Point


♦ The share price of Puncak enjoyed a smooth
uptrend from Nov 2008 to Aug 2009, but failed to
penetrate the resistance level of RM3.30 in late
Aug.

♦ As a result, it kicked off a reversal trend in Nov


2009.

♦ The downtrend dragged the stock to below an


important level of RM3.00, but sentiment has failed
to improve.

♦ Last Friday, the stock broke another key support


level of RM2.50, with a huge bearish candle on the
chart. This indicates renewed selling activity
underway.

♦ Only if it manages to stage an immediate-term


technical rebound to above RM2.50 will it survive
this downturn. Otherwise, we are of the view that it
will head towards a lower support zone of RM1.96 –
RM2.20 region soon.
IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
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