Perak Transit (KL.0186) – Analysis and Share Price

A few days ago, I was invited by WeR1 to have a small group meeting with Perak Transit Berhad’s management. This post is not sponsored.  

Introduction

Based in Ipoh, Malaysia, Perak Transit Berhad (PT) is the only public-listed company in Malaysia with exposure to bus terminals. It operates Terminal Aman Jaya (opened in 2012), located near the North-South Expressway. The company is run by founder Dato’ Sri Cheong Kong Fitt with 21.79% ownership. All of their revenue is earned in Malaysia.

You’ll see a picture of Terminal Aman Jaya below. Take a comparison with some of other Malaysia’s bus terminal to see the differences (link 1, link 2).

Photo credit belongs to TripAdvisor

Here are their revenue sources and contribution:

• Integrated public transport terminals – (34.6% of revenue, 74.9% of PBT, 72.9% margins)
• Petrol Station Operations – (30.9% of revenue, 3% of PBT, 3.3% margins)
• Bus Operations (26.8% of revenue, 6.4% of PBT, 8% margins)
• Others (7.7% of revenue, 15.7% of PBT, 69% margins)

*PBT refers to profit before tax

Bus Terminal Operations

From an investor’s standpoint, it makes the most financial sense to expand their bus terminals because it is the most profitable one. Bus terminals are strategic locations where traffic congregated. With traffic, this provides PT with a business model of charging advertising dollars and rentals from tenants. The passenger number grew from 573,022 in 2013 to 979,650 in 2017. With increased numbers to the terminals, it provides PT with the ability to increase their fees over time and grow the revenue without incurring higher costs.

The growth in passenger numbers allowed PT to increase their revenue from advertising & promotion (A&P) by 7.7% CAGR for the past two years.

Photo credits belongs to TA Securities

To build a bus terminal is not an easy feat. According to Dato Sri’ Cheong, the regulator allows only one express bus terminal per council. Their Aman Jaya terminal is the only gazetted express bus terminal in Ipoh. This presents a certain monopolistic business advantage. This would funnel the alighted passengers to PT‘s terminals. Moving forward, the Aman Jaya terminal would be further developed to include a food court, supermarket, bowling alley, and a cinema. There will also be a new movie animation park which will be a positive spill-over effect to terminal Aman Jaya.

PT is seen as a role model operator for many entrepreneurs and private companies. Most of them are seeking to develop their own bus terminals in the second tier cities of Malaysia. Knowing this, PT created a smaller business segment of bus terminal consultancy for these group of these aspiring bus terminal operators. In exchange, PT charges a 2.5% fees of the total gross development cost.

Unlike Singapore, the people of Perak might have to travel far to find a shopping mall. I  view PT’s move to focus on bus terminal segment as positive because it could be seen as an act of social good by bringing more convenience to the nearby residents. If there are any other future developments centered around PT’s existing terminals, it could boost the valuation of their terminals too.

You could see Perak Transit as a toll-gate business, it is very similar to how a seaport or airport works. Everyone goes through them. The traffic of people is their asset.

Growth Drivers

Since their bus operations do not have high profitability, the focus of the next decade would be replicating its bus terminals to different parts of Malaysia.

PT is building an upcoming integrated (Kampar) bus terminal. It has a gross building area of 478k sq. ft and gross leasable area of 408k sq ft. It is 8x bigger than the existing Aman Jaya. We are expecting to see the opening by end of 2018. It will bring amenities such as hotel, library, banquet hall, badminton court, retail shop, bowling alley, and a gym. A small hotel will also be built and owned by PT.

Given the size of the upcoming integrated Kampar, I estimate a growth of PBT between $15-17m RM.

Next, PT managed to purchase two plots of land at RM 7.97m which is a substantial discount from the actual market value. The land is in Tronoh, Perak. It will be a new terminal focusing on the needs of students and lecturers from nearby universities (Universiti Teknologi Petronas and SEGi University College)

On top of that, PT had acquired land in Bidor. Beyond that, it is also looking into areas such as Temerloh, Pahang, and Kemaman.

1. The rate of success: high as PT is operating within their circle of competence.
2. Possible hindrances: slow approvals or change of government policies
3. Concerns: funding for their big development projects

Other small growth drivers would be the growth of local tourists in Perak.

Risk

Will the government/authorities decide to pull the carpet beneath their foot by invoking their licenses? 

Bus terminals are a societal good that brings convenience to residents and tourists. Hotels, property developments, and other businesses tend to set up base around bus terminals to enjoy spill-over effects. In fact, the government is supportive of PT by providing them a subsidy of a certain percentage of the gross development cost.

The risk and impact of choosing an incompetent bus terminal operator is disastrous.

In Singapore, most of our shopping malls are located near bus terminals.

Fundamentals

The net-debt-equity is 74.8% while the net profit margin is 30.7%. Apart from their 60 days trade receivables cycle, I think the cash conversion cycle is quite okay.

Since the company is in expansion mode, FCF might not be an ideal ratio to use. The EV/CFO is around 13.5x which is considered fair value for a business like this. However, knowing that they have a strong pipeline of growth coming in, I expect the forward FY19 to be EV/CFO 10.6x which is reasonable for a monopolistic business.

I will not use EV/EBIT because it would not make sense because of the high depreciation (non-cash) costs of the business. In FY2017, the profit was $29m and the depreciation is 9.3m.

In any business that I invest, the operations have to be simple and straight-forward. This helps me to understand and identify the key growth drivers of the business easily.

For an example, for Perak Transit, I have to watch the number of passengers coming to the terminals. Ask a few friends on the progress of the terminal development and make a rough estimation of the profits from new terminals. It is not a rocket science. You can see, this business is very visible. However, patience is required for their plans to pan out.

Management

The link to their management profiles is here.

From my 2 hour session with the management, I observed a few things:

• Both Ms. Chin and Dato’ Sri Cheong were straight-forward, honest, and they have a strong understanding of their business model. They are owner-operators. Despite being the top management of a publicly-listed company, they are open and friendly.
• Dato’ Sri Cheong is a conservative director who seeks to grow his business in a stable manner instead of chasing for rapid growth. All of their projects are done with careful analysis with sustainable profits in mind. I feel that’s the most prudent way to grow a business.
• Whenever there were questions about the costs, revenue or margins, Ms. Chin answered them confidently without hesitation and brought our understanding by relating it back to the business model. Through her answers, I saw her as a “hands-on” manager who could recollect financial numbers at a moment’s notice.