Why some highways are less profitable

I do not quite agree when we put it that it is very difficult to project the cashflow projections of highways. Unless we are talking of flying cars and changing habits over transportation over the next 30 – 40 years, this business will be more consistent than many businesses. Yes, we do not know what the future entails but so are many other businesses. As long as cars, trucks and buses are not replaced roads will still be used.

I have been asked on why then some of the highways are not profitable or rather seemed to be not or less profitable. Take a read over this news – PLUS Expressway’s profits for FY2016 was RM288 million i.e. not great for a company this size.

For FY2010, let me show what the number was. FY2010, it was already doing RM1.3 billion PAT. What happened then?

Did the traffic dropped. It obviously did not drop. By 2019, PLUS was already doing RM4 billion revenue. Let’s look at this news. Post delisting, PLUS raised a RM30 billion debt. Much of the money went back to the short term funds raised and for repaying to EPF.

I provide a simple P&L calculation as below. Let’s assume a project in middle of its concession and the P&L is as provided below. If the cashflow is consistent, I do not need to do much, many Investment Bankers will be approaching the company.

With good ratings, the funding rate would allow the owner of the business to take money upfront and use the funds to venture into other projects. So, when people like Warren Buffett says he has $130 billion cash, it does not mean he has no debt, he has carved out his good assets such as the utilities and made available funds for his other acquisitions. So is YTL.

Let’s say the highway has 20+ years to run (and revenue is growing), when approached, the company would raise a RM20 billion debt at probably 5% and the P&L would look like below.

Now, immediately the profits is now 0. Of course, overtime the profitability would increase as it is needed to pay principal for the debt instrument but we usual investors are probably being misrepresented if we do not know the actual exercised behind it. Usually, this kind of projects may be candidates for delisting and then relisting.

The similar situation was probably seen for MTD Capital (which went delisting as well in 2011), the owner for East Coast and KL-Karak Highway.

Today, as provided to me, ECE and KL-Karak Highway together are not making much profits which is not true in actual cashflow per se.

This the reason why I mentioned of cashflow rather than profits for concessions such as highways.