Plus Expressways Berhad Privatization - How much would it cost ?

Recently a political party in Malaysia (MCA) has called upon the government to consider to privatize Plus Expressways Berhad. How much would it cost for the government of Barisan Nasional to privatize Plus Expressways in order to counter the high inflation suffer by the rakyat (people) ?

Projek Lebuhraya Utara Selatan (Plus) the highway concessionaire of the 772-km North-South Highway, is one of the contentious issues among the rakyat mainly due to the excessive toll rate hikes that we have seen since it opened its lanes in the 1990s. The highway concession holder, Plus Expressways Bhd, also holds the concession for the 35-km North Klang Valley Expressway (NKVE), the 16-km Federal Highway Route 2 and the 23-km Seremban-Port Dickson Highway as well. All the above highways have a concession that ends on Dec 31, 2038.

Plus had also recently on Dec 18, 2007 completed the acquisition of the 44-km Linkedua (Second Link) and the 63-km North-South Expressway Central Link (Elite) for RM 866 million. These two highways have a concession period that runs right up to Dec 31, 2038 and May 31, 2030. It is also in the midst of concluding the purchase of the 17-km Butterworth-Kulim Highway, which it is buying from MMC for RM 134 million.

Plus current toll rate structure is basically a simple formula, which is a growth of 10% in toll rates every three years, with the next hike due this year but was deferred due to the general election. The current toll-rate is at 13.6 sen/km and if the 10% hike was implemented this year, the rate would have go up to about 15 sen/km. The next hike is due in 2011 and the last hike would be in 2029. This means based on the current rate of 13.6 sen/km now, the toll rate in 2029 would rise to 29.3 sen – a 115% increase in 21 years or at an compounded rate of almost 4% per annum.

Based on the current market closing price of Plus shares on Bursa Malaysia (27.06.2008) at RM 2.53 per share, the company is valued at about RM 12.65 billion.

Now, to mitigate the burden to the rakyat, let’s look at the cost of privatization of Plus itself. As the government owns approximately 63.88% via Khazanah Nasional (23.67% direct and 40.21% indirectly via the GLC, UEM Group Bhd) to buy up the remaining equity in Plus is only going to cost the government RM 4.569 billion (ie, 36.12% shares not already owned, translating to 1,806 million shares at RM 2.53 per share).

However, as investors may need some sort of confidence to accept the offer, lets say the offer is at RM 3.50 per share which will raise the total cost to only RM 6.321 billion.

Now, lets look at Plus’ balance sheet as of Dec 31, 2007. It has RM 5.34 billion in shareholders’ funds, RM 9.97 billion in both short-term and long-term borrowings (borrowings linked to only debt at the above concessions) and cash equivalent of about RM 2.582 billion (excluding amount of toll compensation recoverable from the government amounting to RM 1.393 billion).

Hence, to retire all the borrowings at Plus level, the total amount that the government needs to inject into Plus amounts to only about RM 7.388 billion. Together with the cost of buying-up the minorities, the total cost works out to be RM 13.709 billion or just RM 456.9 million per year over the next remaining 30 years of concession period for the highways.

This RM 13.709 billion spent will be a gift for rakyat with all toll plazas on all the above highways being removed. Based on the current revenue stream of Plus, it has total revenue of about RM 2.276 billion (inclusive of government compensation) for the Financial Year ending Dec 31, 2007 and enjoys Earnings before Interest Tax and Depreciation of about RM 1.95 billion or an operating margin of about 80%.

It made about RM 1.25 billion in profits and it is envisaged that this profitability level will be at about RM 1.184 billion this year and RM 1.24 billion in 2009 (source: Bloomberg). As the cost of maintaining these highways is less that RM 400 million per annum, this allocation can be made from the government coffers for after all, the government is already spending about RM 450 million (net basis) compensating Plus every year due to the difference between the current toll rates and agreed toll rates as per the concession agreements.

The RM 13.709 billion spent in taking Plus private and removing all toll plazas translates to about RM 500 per capita and only about RM 1,256 per voter – a small price to pay compared to Plus’ annual turnover of RM 2.2 billion and projected combined revenue of RM 100 billion over the next 30 years.

With the current fuel prices hiked on 5th June 2008, the government have already save up to RM 50 billion to RM 55 billion worth of subsidies petrol and diesel per year (if the current crude oil prices held steadier between USD 125 per barrel - USD 150 per barrel), hence the government will be able to privatize the company. WOULD IT BE A REALITY ???

Based on Plus’ revenue, the average vehicle in Malaysia pays RM 220 per year and this can be used to counter rising inflation pressure. What is more appealing is that by removing the toll plazas, the cost of transportation will be reduced, the cost of carrying goods as well as passengers will be lower and hence lower prices for goods in the market and lower inflation.

PLUS Issued and Paid-Up Capital : RM 1,250,000,000.00
Class of Shares : Ordinary Shares of RM 0.25 each.