This article first appeared in The Edge Financial Daily, on October 16, 2015.

Construction Sector
Maintain overweight, higher toll rates from yesterday: It was reported that toll charges for 18 highways were raised between 10 sen and RM3 effective yesterday. 

Out of this, 12 are major highway concessions operating within the Klang Valley. They are the Kuala Lumpur-Karak (KLK) Expressway, Maju Expressway (Mex), Kajang Dispersal Link Expressway (Silk), Duta-Ulu Kelang Expressway (Duke), Stormwater Management and Road Tunnel (Smart), KL-Kuala Selangor Expressway (Latar), Sungai Besi Highway (Besraya), New Pantai Expressway (NPE), Kajang Seremban Highway (Lekas), Damansara Puchong Highway (LDP), Western Kuala Lumpur Traffic Dispersal Scheme (Sprint) and Cheras Kajang Highway (Grand Saga). 

Other highways that followed suit included the South Klang Valley Expressway (SKVE), Guthrie Corridor Expressway (GCE), Kemuning Shah Alam Highway (LKSA), Ampang Kuala Lumpur Elevated Highway (Akleh), Senai Desaru Expressway (SDE) and Butterworth Outer Ring Road (LLB).

Altogether, toll rates for all eight highways under PLUS Expressway Bhd remained unchanged at this juncture. 

They are the North South Expressway (NSE), New Klang Valley Expressway (NKVE), Federal Highway Route 2, Seremban Port Dickson Highway, North South Expressway Central Link (Elite), Second Link Malaysia Singapore (Linkedua), Butterworth Kulim Expressway (BKE) and Penang Bridge.

We believe this is part of the government’s move to meet its budget deficit target of 3.2% for 2015 (2014: 3.5%) and support its sovereign rating amid a challenging global economic backdrop. 

Prior to this, the government had since 2008, delayed toll rate hikes to soften the financial impact on toll users. Notably, federal compensation to highway concessionaires totalled RM1.1 billion between 2008 and 2013 (2014: RM403 million). 

Using 2014 as a base, this could potentially translate into over RM2 billion in “savings” from toll compensation obligations over the next five years under the 11th Malaysia Plan period (2016 to 2020), which the government can redeploy for other productive uses (e.g. public infrastructure).

For construction stocks within our coverage, Gamuda Bhd (Kesas, Sprint, LDP, Smart), IJM Corp Bhd (Lekas, NPE, Besraya) and Malaysian Resources Corp Bhd (MRCB) have exposure to Malaysian highways. 

Only the former two have toll concessions, which are due for hikes under the latest round. Toll assets account for 18% of Gamuda’s net asset valuation; IJM (27%) and MRCB (8%).

Based on historical trends, the latest round of toll revisions would likely trigger a dip in overall traffic over the next two to three months, although the actual quantum could be negligible. — AmResearch, Oct 15