KTM has attracted interest from the private sector, including Renong Bhd and Gamuda, despite being saddled with debt and being in the red for few years.
Now, MMC Corp is the latest company attempt a takeover of KTM, having submitted a proposal to the MOF to conduct a due diligence for a possible takeover.
KTM continues to chart losses due to the large capex for its electric train services (ETS) and electric double track project. The bulk of its capex comes from the government .
The billions of ringgit in capex involving the expansion of railway services may be why MMC is interested in a takeover of KTM.
KTM’s Project Management Department, appointed as the technical adviser and manager for contractual matters and in house works, managed some rm2 billion to rm3 billion annually in 2008 and 2009 to upgrade the company’s railways. In addition, contracts worth nearly rm20 billion have been awarded for the electrified double track project, which comes under the purview of the PMD.
This is government spending on railway services, with KTM via PMD having a larger say on where the jobs go. This is the most important part of KTM and why somebody would want to have control over the entity.
Interest in KTM is similar to investor attention in loss making SYABAS, which was taken private. The attraction in SYABAS is that it has between rm1 billion to rm2 billion of capex works per annum where the concessionaire can expect returns.
MMC already play a role in the rm12.5 billion contract for the developing of the 329km Ipoh-Padang Besar double track railway line.
The whole project, along with the ETS, is being executed in conjunction with KTM’s two year corporate restructuring effort, which is expected to turn around the company by 2015.
The ETS and double tracking project will substantially boost KTM’s line capacity, for which the company needs to purchase additional rolling stocks such as new electric train sets, locomotives, coaches, wagons and power generation cars.
KTM has stated that it will invest another rm1 billion in the ETS to grow its electric fleet to 26 sets.
Indeed a strong incentive for the privatization of KTM is the reduced funding it would require from the government.
If the government does privatize KTM, it would not be the first time. In 1997, KTM was taken private and the government eventually took back KTM in 2001 after the consortium failed to meet its obligations to the railway entity. Sources say these obligations included forking out rm100 million to beef up KTM’s capex.
Would MMC be able to bear such a hefty burden? Certain quarters have also questioned if MMC will be able to afford the acquisition on KTM’s operations. As at FY2010, MMC was in a net debt positon of rm14.06 billion, with rm19.4 billion in borrowings and rm4.85 billion in cash.
It is worth nothing that this is not the company’s first attempt. It tried to do so with Gamuda in 2003, in a deal where the government would retain ownership of the railway tracks, which are valued at rm50 billion. But nothing materialized.
Industry observers say KTM should liquidate its assets to ease its cash flow. It has been a burden for the government to subsidize unprofitable routes and borrowings.
KTM has received about rm30 million annually in claims from the government for the running of unprofitable routes that have been retained for public benefit in East Malaysia . Additionally the government extended rm760 million to KTM from 1194 to 2008.
It was reported that annuity payments for five easy loans totaling rm881 million franted to KTM have yet to be paid, despite having matured in the middle of 2009.
An area of unlocked value in KTM may be its property segment, which has seen dwindling earnings and contributes marginally to the company’s top line. This is because KTM’s best tracts have been already assigned to or are being developed by private sector companies.
It should either liquidate these real estate or partner with able corporations that are in a position to capitalize on and bring out the best possible GDV.
One major setback in developing KTM’s land is that it is limited to railway use only. If it is to be converted for any other use, the approval must come from the federal commissioner of land or the state authorities.
Its shareholding in underperforming JVs, associates or subsidiaries could be liquidated to lighten the company’s balance sheet.
A point of interest would be its wholly owned subsidiary, Multimodal Freight Sdn Bhd which seen substantial growth. KTM has said that MMF is looking to list on Bursa ’s second in five years to tap financing opportunities to meet business expansion requirements.
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