IJM Corp Bhd’s move to increase its stake in Indian toll road concessionaire Swarna Tollway is a sign of bigger things to come.
Sources say IJM is looking at listing its infrastructure assets — in India as well as those in Malaysia — in India. The group is also exploring the possibility of a dual listing on Bursa Malaysia. “IJM has roped in consultants to make preparations for the listing exercise,” says a source.
It is learnt that IJM is in the midst of consolidating its Indian infrastructure assets. It is looking at buying out the minority shareholders in the JV partnerships, says the source.
While talk of IJM wanting to carry out an initial public offering of its Indian infrastructure assets has been around for some time, observers say what is new this time is that the group is also looking at the possibility of including its Malaysian assets — three toll concessions and two ports — in the exercise as well.
Should it take place, major shareholders, which includes the Employees Provident Fund (EPF) which owns a 20% stake in IJM, will get to unlock the value of their investments overseas, says an industry observer.
“Instead of the EPF investing in a company overseas which it is not familiar with, it is better for it to put its money in a company where it is familiar with the management,” he says.
The local highway and port concessions are said to be worth more than RM1 billion, and the value is poised to increase as the assets mature.
IJM looks like it is already making headway on the potential corporate exercise by taking up a higher stake in Swarna Tollway.
Last Tuesday, the group proposed to take over WCT Bhd’s and MTD Capital Bhd’s interests in CIDB Inventures Sdn Bhd — which owns 30% of Swarna Tollway Pte Ltd (STPL) — for RM27.4 million.
IJM would also acquire a 28% stake in STPL from units of WCT and MTD for RM66 million, putting the entire deal at RM93.4 million.
In an Oct 6 research note, Maybank Investment Bank Research said IJM’s acquisition was not surprising as both WCT and MTD were interested in crystallising their investments.
The proposed acquisitions will effectively raise IJM’s total stake in STPL to 76.4% from 35%.
STPL is the concessionaire for the Swarna Tollway Project in Andhra Pradesh in southeast India. STPL, which is understood to be profitable, has a 30-year concession expiring in 2013, and collects toll on two road sections.
In FY2010, the Indian tollways contributed a higher revenue of RM98.3 million compared with RM71.4 million the previous year. The tollways also recorded a pre-tax profit of RM34.3 million against a loss of RM21.38 million in FY2009.
IJM says this was due to the recognition of a foreign exchange translation gain of about RM57 million in relation to offshore US dollar-denominated borrowings. Without the gain, the Indian infrastructure division would still be in a pre-tax loss position.
While two of the Malaysian highways — Besraya Highway and New Pantai Expressway (NPE) — are the main contributors to IJM’s toll road earnings, industry observers say there is also an exciting growth path in its Indian toll concessions.
In its FY2010 annual report, IJM says it is anticipated that the Indian tolling operations would continue to face challenges in terms of traffic volume and high debt costs, given that they are still in the early stages of the concessions.
However, it says these factors will be mitigated by the maturing profile of the existing assets with improved toll collections and higher traffic volume.
“IJM’s concession assets may be young, but it is a matter of time before they start contributing more significantly, and that will be a catalyst to enhance IJM’s valuation then,” says an industry observer.
In terms of profit contribution to the group, the infrastructure division has been playing a more prominent role. It contributed 11% or RM539 million to the group’s revenue, according to the company’s FY2010 annual report. In terms of profit before tax, the division grew more than threefold to RM96 million from RM26 million — the fastest among IJM’s divisions.
IJM says the improved turnover is mainly due to the coming onstream of it 20%-owned Gautami Power Plant in India and higher collections from Malaysian and overseas toll roads and local port concessions.
IJM’s infrastructure assets comprise nine toll concessions — three in Malaysia, five in India and one in Argentina.
In Malaysia, IJM wholly owns Besraya and NPE, as well as 50% of the partly completed Lebuhraya Kajang-Seremban (LEKAS). It also has two ports — Kuantan Port and Kemaman Port in Terengganu — as well as a power plant in India and a water treatment facility in Vietnam.
In India, IJM wholly owns the Rewa toll road (387km) and after the latest exercise, a 76.4% stake in the Swarna toll road (145km), which has been operating for six years. The new additions to IJM’s toll road assets in India are the 50%-owned Chilkarulipet-Vijayawada (79km) toll road and Trichy toll road, as well as the wholly-owned Jaipur-Mahua. The concession periods range from 16 to 31 years.
A listing of foreign assets is not new to the IJM Group. The group has a 20% stake in Grupo Concesionario del Oeste S.A, which is listed on the Buenos Aires Stock Exchange. The company operates a 21-year concession of the Western Access Tollway (56km) in Buenos Aires, Argentina.
In 1996, IJM entered into a agreement to form a joint venture company with companies from Argentina, Brazil and Mexico to participate in the tollway concession.
IJM also acquired several concessions in China in the mid-1990s, but they have since been disposed of in recent years. The assets included Guangdong Provincial Expressway Development Co Ltd, which operates two expressways and is listed on the Shenzhen Stock Exchange. Between 2001 and 2007, IJM disposed of its entire stake in the company, held via its unit, IJM Overseas Ventures Sdn Bhd, at a profit.
IJM also disposed of stakes in a JV company that is a concessionaire for the Yangzhong Changjiang bridge and another JV partnership that constructed and operated the Wuxi Nenda Co-Generation Plant in Xishan City, Jiangsu Province.
It will be interesting to see whether IJM will adopt a similar strategy with its infrastructure assets.
This article appeared in The Edge Malaysia, Issue 827, Oct 11-17, 2010