Ampang-Kuala Lumpur Elevated Highway, Guthrie Corridor Expressway, Lebuhraya Kemuning-Shah Alam and Sistem Lingkaran Lebuhraya Kajang are part of a business trust structure managed by trustee-manager Prolintas Managers Sdn Bhd, to be listed under Prolintas Infra BT, the first business trust in Malaysia.
THE subject of business trusts (BT) was the talk of the town recently following the prospectus launch of Prolintas Infra Business Trust (Prolintas Infra BT).
Not surprisingly, there are a number of people, investors and the general public alike, who may not be fully aware of what a BT is. The concept is not new: it was introduced under the Capital Markets and Services Act 2007 (CMSA) and the issuance of the Securities Commission Malaysia’s (SC) Business Trusts Guidelines (BT Guidelines) in 2012.
A BT is essentially a unit trust scheme which is constituted by a trust deed, where the operation or management of the scheme and the scheme’s property or asset is managed by a trustee-manager.
Unit holders can participate in the profits or income arising from the management of the assets in the BT through receipt of distributions. In Malaysia, BTs are sometimes confused with real estate investment trusts (REIT) with many investors believing that both are the same.
While one may naturally draw a comparison on the similarities between a BT and a REIT structure, there are some key differences.
Difference between REITs and BTs
In terms of governance, the roles of the REIT manager, trustee and property manager in a REIT are distinct and undertaken by separate entities.
These roles can be undertaken by the trustee-manager in a BT, because the safeguards accorded to unit holders were enshrined in the CMSA and BT Guidelines, which mitigate potential conflicts of interest.
When it comes to the underlying asset class, REITs largely invest in investment properties.
There is, however, generally no restriction on the type of assets that may be injected into a BT.
Listed REITs are subject to periodic valuation requirements, various investment limits and restrictions, as well as a 50% cap on borrowing-to-asset ratio, all of which do not apply to a BT.
From a taxation standpoint, REIT generally enjoys income tax exemption if it distributes at least 90% of its distributable income.
Such distribution is subject to various rates of withholding tax or taxation in the hands of the investors, depending on the type of investor.
Meanwhile, BT is subject to income tax in the same manner as a company, and subsequently, any distribution is not subject to tax.
Based on that, it is safe to say that BT is similar to a public-listed company in terms of investment and financial flexibility, as well as taxation.
If so, why go the BT route instead of the more conventional listing of the company or REIT platforms? What sets BT apart?
Table shows the contribution of toll revenues in 2023 of the four highways under Prolintas Infra BT.
Strategic appeal
The key value proposition is that BT can pay distribution to its unit holders out of the operating cash flows without being constrained by accounting profits.
It is not surprising that BT is often presented to investors as good dividend-plays.
BT is particularly relevant for businesses that have existing and sizable assets that require high upfront capital expenditure but currently possess strong and steady cash flow generation from these assets.
These businesses will often have lower accounting profits arising from high depreciation or amortisation charges due to the high upfront capital expenditure needed to construct those assets.
Businesses that exhibit these characteristics are generally large-scale infrastructure development companies, those that have built roads and bridges, ports and airports, telecommunication networks and data centres, utilities such as electricity, water and sewage as well as power plants.
Although investment properties, such as malls and office blocks, also have high upfront capital requirements,, they do not tend to have high depreciation/amortisation charges given the frequent revaluation of their property assets.
Companies with sizable infrastructure projects that are involved in this space will require a clever avenue to unlock the value of their assets to enable them to start new ones while simultaneously providing attractive investment opportunities for long-term investors.
The traditional method of relying on public funds may not be sustainable in the long-term, more so as other new and advanced infrastructures are now required to sustain economic growth.
Rethinking infrastructure financing
Building large scale infrastructure is expensive and to reiterate, the initial capital outlay is immense.
Additionally, due to the slow rate at which the invested capital is recovered, infrastructure companies can often find themselves burdened with high levels of debt and limited cash reserves to invest in new projects.
Today, pension obligations and other debts facing all levels of the Government mean that there just aren’t sufficient public funds to pay for necessary infrastructure moving forward.
While interest rates remain low, the ability of the Government to borrow from capital markets is hindered by debt caps and weak credit ratings.
Not investing in strategic infrastructure is also not an option. In this case, money saved is not money earned. Expressways or highways are critical to support the rapid urbanisation taking place in Malaysia.
The enhanced connectivity for people and goods to move efficiently is also a key factor towards bolstering the nation’s competitiveness and attracting foreign direct investments.
In addition, innovative infrastructures like large scale solar and other renewable energy platforms have become vital to ensure sufficient sustainable power generation to meet future needs while unlocking the positive multiplier impact of the green economy.
In supporting the digital economy, telecommunications infrastructure will also be required for Malaysia to take full advantage of the fourth industrial revolution and to drive high-income jobs in the technology arena.
Given that the nation’s strategic infrastructure needs may be hampered by financing constraints, there is clearly an urgent need to change how large scale high-impact infrastructure projects are financed.
This is where BT has the opportunity to drive nation-building forward, by unlocking the value of existing assets to fund the new ones, while creating an appealing investment opportunity for both retail and institutional investors.
Prolintas Infra BT paving the way
Last week, Projek Lintasan Kota Holdings Sdn Bhd (Prolintas), which owns a portfolio of toll highways, announced that they had decided to establish a BT where they have injected four of their matured highways to the BT.
The initial public offering (IPO) on the Main Market of Bursa Securities is scheduled for the first quarter of 2024. If all goes according to plan, Prolintas Infra BT will make history by being the first BT to be listed in Malaysia.
For a company like Prolintas, which is involved in designing, constructing, operating and maintaining highways and expressways used by millions of Malaysians, it is a natural candidate for the BT structure.
Based on its 2024’s financial forecast as disclosed in Prolintas Infra BT’s IPO prospectus, the trustee-manager intends to distribute a total of RM70mil to the trust’s unit holders on the back of net cash flow generated of about RM88mil and an opening cash balance of more than RM400mil.
This is despite only having RM8.3mil in the trust group’s accounting profit.
If Prolintas had opted to list its four brownfield highways via a conventional company structure, clearly the dividend cannot be sustained due to the constraints on accounting profits.
When it comes to toll highways, the BT model is also presumably less volatile compared to a REIT.
This is because a REIT’s performance is normally subject to its rental rates determined by supply and demand.
In a downturn, where supply outstrips demand and rates are pressured, investors may be subject to a longer cycle under capital loss.
A BT on toll highways, on the other hand, may be less volatile as the number of cars on the road are expected to increase based on historical trends.
In addition, given that Prolintas Infra BT comprises urban highways, it can leverage on the rapid urbanisation rate, which is higher than the country’s national population growth.
Prolintas Infra BT may also benefit from the increase in toll rates in the foreseeable future.
While Prolintas Infra BT may be an ideal avenue for both the company and its investors, the BT structure may not necessarily apply to greenfield infrastructure businesses or projects as it is more relevant for relatively mature cash yielding assets to sustain distribution flows.
For a BT to be formed and listed, it is required to have a market capitalisation of at least RM1bil based on the issue or offer price. The core business underlying the BT must also be in operations and generating operating revenue for at least one financial year prior to their application to the SC.
Additional requirements apply where the core business of the BT comprises infrastructure assets, including the infrastructure undertaking, must have had a minimum development cost of RM500mil.
The criteria highlighted above are just some of the requirements required to fulfil the BT guidelines. On that note, BT may provide a very viable fund-raising avenue for infrastructure developers planning to “recycle” the capital on mature assets for redeployment into new infrastructure projects.
This would be beneficial to the country in terms of speeding up the development of critical infrastructure that can help increase the level of competitiveness while improving the quality of life for all Malaysians.
All in all, investors should acknowledge that the type of the listing vehicles, be it a company, REIT or BT, is not the fundamental consideration that should drive their investment decisions. Emphasis should still be given to a company’s, REIT’s or BT’s investment objectives and the prospects and risks of the underlying business.
Foo Lee Khean is an observer and commentator on subjects that matter most to Malaysians, from politics to the economy.
He is a Fellow Member of the Chartered Institute of Management Accountant, United Kingdom and the Malaysia Institute of Accountants, and has been a member of the board of directors in several listed companies in Malaysia.
