Construction - No toll hike is still good news

Recommendation: Over Weight

The Deputy Prime Minister's announcement of no toll-rate increases this year was a surprise in view of the government's subsidy rationalisation initiative. Average toll-rate hikes in 2014 could have been 43% for the major highways, by our estimates. A no-hike scenario is a net positive for the concessionaires, in our view, as compensation will be paid and traffic volume will not suffer. We expect Gamuda and IJM Corp, the blue-chip contractors and owners of major urban highways, to get the lion's share of the RM400m compensation due. We remain Overweight on the sector with catalysts expected from MRT 2 and revival of job flows. Gamuda remains our top pick.

What Happened 

No toll hikes for major highways in the Klang Valley. Deputy Prime Minister, Tan Sri Muhyiddin Yassin, announced that there would be no toll increases this year. The government would need to pay RM400m in compensation to the concessionaires involved, mainly in the Klang Valley. 

What We Think 

Still positive for the toll concessionaires. The announcement of no toll-rate increases this year was, in retrospect, a surprise in view of the government's subsidy rationalisation initiative. The decision appears to accommodate the public's concerns arising from the fuel and electricity price increases last year. The average toll-rate increase for major highways could have been 43% for the 14 major urban/intra-urban highways, by our estimates (Figure 2). But no hikes should still be a net positive for the toll concessionaires, in our view. The government will honour its concession agreements and pay the compensation due. A no-hike outcome also eliminates risks of a dent in traffic volume, which usually dips for 3-6 months after a rate increase. The RM400m compensation due for 2014 will be the highest in seven years (Figure 1) and will bring the government's cumulative compensation to RM1.5bn since 2008. 

What You Should Do

Accumulate the beneficiaries. In our construction universe, blue-chip contractors/highway concessionaires are Gamuda (Add, TP RM5.24) and IJM Corp (Add, TP RM6.52). They own most of the highways due for toll-rate increases this year and are likely to benefit from a bigger share of the compensation due. Any share-price weakness from toll-rate news should present buying opportunities, in our view.