NCBCap raises TransJamaican valuation despite COVID impacts

NCB Capital Markets Limited, the brokerage that arranged the TransJamaican initial public offering and listing of shares, expects a significant revenue fallout from a decline in traffic flows along Highway 2000 due to the coronavirus.

In its worst case scenario, the brokerage said it assumed the prospect of a 50 per cent decline in toll revenue over the next six months, based on falling volumes of motorists travelling to work and school, but did not reveal the underlying data for its analysis.

“We looked at the drop in traffic volumes in the aftermath of the 2008 crisis and magnified that significantly to create a worst-case scenario. Please note that it is not our expectation that revenues will fall this much. However we wanted to see how our valuation would be impacted in this extreme case,” the brokerage said.

TJH has been trading below its listing price of $1.41 since its market debut a week ago. The brokerage had a valuation of $1.71 on the stock during the IPO, which it cut to $1.67, down four cents to account for the effects of the virus.

It has since assigned TJH a valuation of $1.74, saying the debt financing raised by the toll road operator is a counter-balance to the effects of the virus.

Earlier this year, TransJamaican raised US$225 million in debt at 5.75 per cent interest, a transaction also arranged by NCBCap. It was a better price than the 6.5 per cent at which TJH and its arrangers expected to raise the debt.

“Taking all these new developments into consideration, we observe that the anticipated short-term negative impact that COVID-19 will have on TJH’s revenues, profit and cash flow will largely be offset by the benefits that will accrue to the company from better debt financing terms,” said NCBCap.

COVID IMPACT

“We found that the impact of the fall in revenues for TJH, over the six-month period, on the company’s valuation was small. Further, over the long-term, TJH will also benefit from better debt financing terms than was originally assumed in our valuation model which will offset the adverse impact of COVID-19,” the brokerage said, regarding the TJH valuation.

The Financial Gleaner was unable to determine up to press time whether other brokers in the market shared NCBCap’s sentiment. As to the market’s reception to the TJH stock, the share price has recovered somewhat since its debut on the JSE, from its low point of $1.18 to a closing price of $1.35 on Tuesday, but the stock is still trading below its listing price.

The original traffic projections for Highway 2000, as outlined in the TransJamaican IPO prospectus were for 24.3 million vehicles to commute in 2020, generating tolls of US$56 million; and 24.8 million vehicles in 2021 with tolls projected at US$58 million.

Over six months, half of the 2020 revenue translates to about US$14 million ($1.9 billion), but that estimate by the Financial Gleaner does not take seasonal variations into account.

The TJH concession for the highway expires in 2034 over which time traffic is projected to grow annually by an average of 2.3 per cent.

Efforts to reach National Road Operating & Constructing Company Limited, NROCC, the state company that owns TransJamaican Highway Limited, regarding the highway’s traffic outlook, were unsuccessful.

There are four toll plaza segments on the highway at May Pen, Vineyards, Spanish Town and Portmore. The bulk of the toll revenue comes from the Portmore plaza, which is fed by commuters to and from Kingston.

TransJamaican was taken public by NROCC, a transaction that was proceed by the takeover of the toll concessionaire from French firm Bouygues Travaux Publics and its partners, as part of its privatisation programme for state assets.

steven.jackson@gleanerjm.com