IJM Corp offers RM398m for Silk Highway

KUALA LUMPUR: IJM Corp Bhd has proposed to acquire the 37km Kajang Traffic Dispersal Ring Road, better known as Silk Highway, from Silk Holdings Bhd for RM398 million cash.

In a filing with Bursa Malaysia yesterday, the group noted that its wholly-owned subsidiary, Road Builder (M) Holdings Bhd, had entered into a heads of agreement (HoA) with Silk Holdings to acquire the entire equity interest in Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (Silk) — the concessionaire of Silk Highway.

The sale proceeds of RM398 million will be a windfall for Silk Holdings’ shareholders, considering the company’s market capitalisation is RM413.2 million based on yesterday’s closing of 85 sen.

However, Silk Holdings did not reveal the utilisation of the proceeds. The company had borrowings of RM1.73 billion as at Jan 31. Its debts are expected to be reduced after the divestment of the highway. However, the portion of the debts tied to the toll road concession is not known.  

Silk Holdings said in the announcement to Bursa that the proposed disposal provides the opportunity for it to unlock the value of its investment in the toll road and to concentrate on the oil and gas support services business.

As for IJM Corp, the group reasoned that the proposed acquisition is in line with the group strategy to increase recurring income stream. But, IJM Corp noted that the purchase consideration would be subject to an adjustment arising from the results of the due diligence inquiry on Silk and its subsidiary.

Should the deal materialise, this will be the fourth highway concession IJM Corp owns in Malaysia, excluding West Coast Expressway which has yet to be completed. IJM Corp’s website showed that the group owns and operates the Sungai Besi Highway, New Pantai Expressway and Lekas.

IJM Corp’s infrastructure division registered revenue of RM597.18 million and a net profit of RM189.12 million for the financial year ended March 31, 2014 (FY14).

The group pointed out that Silk highway links IJM Corp’s existing toll roads — Besraya Highway, the New Pantai Expressway and the Kajang Seremban Highway. Hence, it will improve the connectivity of these highways.

“The proposed acquisition is expected to contribute positively to the future earnings and cash flow of the group as Silk Highway is a growing highway with increasing traffic growth,” IJM Corp said.

The company said the Silk highway is in a growth corridor with increased property developments around Kajang and nearby areas spurred by the Mass Rapid Transit (MRT) project, and has been registering traffic growth of about 16% on a compound annual growth rate (CAGR) basis.

“With the proposed acquisition, the total length of the group’s toll roads in Malaysia, including the upcoming 233km West Coast Expressway, will increase from 325.8km to 362.8km,” said IJM Corp.

The concession period of the Silk highway has been extended to 36 years that will end on July 31, 2037. The highway commenced operations in 2004 and it has been reported that the construction cost of the highway was RM1.1 billion.

Since FY09 ended March 31, traffic has grown at a strong 15% four-year CAGR from 99,000 vehicles per day to 173,000 vehicles per day in FY13, according to a research report by MayBank Research in February.

According to Silk Holdings’ latest annual report, the Silk highway recorded total traffic volume of about 62.9 million vehicles for FY13 ended July 31, an increase over the total traffic volume of 55.7 million recorded in the previous financial year.

“While toll rates may be increased in accordance with the concession agreement, the government may impose lower, or defer, the increase in toll rates due to economic circumstances and public sentiments,” it said.

IJM Corp and Silk Holdings both pointed out that that the conditions of the proposed acquisition include the approval of Economic Planning Unit and Public Private Partnership Unit in the Prime Minister’s Department.

“The parties shall negotiate on an exclusive basis and execute a definitive sale and purchase agreement within 14 business days from the date of the HoA,” said IJM Corp.



This article first appeared in The Edge Financial Daily, on May 28, 2014.