Dubai toll road operator Salik’s forthcoming listing is attracting significant investor attention, given the firm’s high local profile, its enviable profitability metrics and its commitment to distributing 100% of profits to shareholders. The AED2.00 fixed subscription price gives clarity and positions the shares directly at yield-seeking investors. We take a look at the firm’s business model, growth potential and risks to the investment case, via 12 key points of interest for potential investors.
1. Attractive transaction structure but headwinds are emerging
The Government of Dubai will sell a 20% stake (1.5bn shares) in toll road operator Salik via a secondary sale to the public. The shares, which have been deemed to be Shariah-compliant, will be listed on the Dubai Financial Market later this month.
The subscription period runs to 20 September for retail investors, with institutional investor subscriptions running to 21 September. Eligible employees will also be able to subscribe via a separate tranche. 5% of the offer has been reserved for the Emirates Investment Authority and a further 5% for the Pensions and Social Security Fund of Local Military Personnel.
Originally, pricing was to be determined via a book-build process, which is standard internationally. But this approach has now been replaced with a fixed price offering (at AED2 per share ie a US$4.1bn initial market cap), which is more common locally. Several local institutions (UAE Strategic Investment Fund, Dubai Holding, Shamal Holding, Abu Dhabi Pension Fund) have already committed AED600mn to the issue, which could result in allocations for other investors being curtailed. The existence of these large long-term shareholder blocks could also limit secondary market liquidity once the initial flurry of trading subsides. News reports suggest the transaction size could be upped from 20% to 25% of the company, which would help to alleviate these issues. Note that the selling shareholder is subject to a 180-day lock-up post-listing.
One attraction of the shares is the dividend yield; the company expects to distribute 100% of its profits as dividends, once statutory reserves have been filled. The focused business model (both by geography and activity), strong financial performance and top-line growth potential should also prove interesting for investors. Key risks, in our view, include governance and technology.
An important consideration for investors relates to the timing of the transaction. As a utility-like yield play, the share price may be vulnerable to rising interest rates (since yields on alternative investments would also increase). The firm’s prior performance also suggests its top line could suffer if the economy were to contract, although it should prove more defensive than many other firms under this scenario.
2. A simple, high-quality business model
The Road Traffic Authority (RTA) was established in November 2005 to develop solutions for Dubai’s transportation needs. Salik tolls commenced in July 2007, with one toll gate on Al Garhoud bridge and a second at Al Barsha.
The Salik corporate entity, the sole toll road operator in Dubai, was established in June 2022. The firm now operates eight toll gates, all of which use radio frequency identification (RFID) and optical character recognition (OCR) technology to ensure fast and low-cost collection of tolls. In June, the firm entered into a 49-year exclusive concession agreement (ie expiring in June 2071) to operate all current and future toll gates in Dubai.
Toll roads allow for faster journey times for travellers. Over 60% of Dubai journeys take place in private vehicles. In 2021, Salik oversaw 367mn revenue-generating trips and generated AED1.7bn revenue (USD461mn). In H1 22 ,there were 205mn revenue-generating trips, while the firm’s revenue was AED0.9bn (US$257mn).
The firm provides exposure to population growth and economic activity in Dubai, while its track record of operational excellence could potentially generate additional revenues in other jurisdictions, eg through licensing arrangements. There is also scope to raise prices and install additional toll gates in the future.
3. Salik is fantastically profitable
The firm is both asset-lean and cost-light. In 2021, its net profit margin was a whopping 80% and its EBITDA margin was 82%. Free cashflow was 73% of revenue in that year. All these metrics have improved in H1 22 as the Dubai economy has bounced back from the pandemic. Revenue and profit per employee for this year are running at cUS$12mn and US$7mn, respectively.
Note, however, that the profitability of the listed entity will not quite reach these heady heights, largely for two reasons. First, an annual concession fee expense will be levied. Second, the concession will add to the firm’s asset base, and the amortisation charge would hit net profit (although cashflows and proxies, such as EBITDA, would be unaffected). Given the higher asset base, return on assets would also be substantially lower.
Nevertheless, the firm is among the global industry leaders when it comes to key financial performance indicators.
4. Financial performance compares favourably to global peers
We see two clear peer groups for Salik. The first group consists of listed toll road operators globally; the second comprises listed-UAE firms outside the financials sector. Our own shortlists of firms in both these groups are presented in the Appendix.
Benchmarking Salik’s own performance against these investment alternatives can help investors gauge whether the shares should trade at a premium or discount to these peers, and the extent of divergence that is appropriate.
The impact of the pandemic is a clear distorting factor when we look at historical top-line growth trends. Nevertheless, over the past three years, the global industry peer group has delivered impressive 10% annual sales growth, while UAE peers have delivered 6% top-line CAGR. In contrast, Salik has delivered 5.5% pa top-line growth between 2013 and 2019.
The median EBIT margin for these listed toll road firms in their last reported full year was 51%, while the net profit margin was 23%. For the UAE peer group, EBITDA was 39% and net margin was 21%. For Salik, the respective numbers (as percentages of 2021 sales, after adjusting for concession fees and amortisation of the concession rights) are 67% (EBITDA), 62% (EBIT) and 59% (net profit).
Note also that a 9% corporate tax rate is likely to be introduced in the UAE in 2023, which is likely to depress the net profit margin relative to historical levels. But Salik’s financial performance should nevertheless outshine that of its peers. Further details regarding our calculations are presented in the Appendix.
5. Salik pricing will appeal most to yield-focused investors
Somewhat unusually, the Government of Dubai has announced a fixed price at which it is selling its 20% stake in Salik, with these 1.5bn shares being priced at AED2.00 apiece, giving the firm an initial market capitalisation of AED15bn (US$4.1bn). Looking at valuation multiples, this positions the shares at c8.9x trailing revenues, 15.0x earnings and a 6.7% dividend yield. Based on annualised H1 22 data, Salik has been priced at 7.9x sales, 13.3x earnings and 7.5% dividend yield.
Examining 15 large-cap UAE listings outside of the financials sector, median trailing valuations are 2.4x price/sales, 13.1x PE and 3.5% dividend yield.
We have identified 18 listed peers operating in the road tolls business. although several are also involved in other activities. Many are located in China. Median trailing valuations for this peer group are 2.2x price/sales, 15.2x EV/EBIT, 9.6 PE and 4.4% dividend yield.
When assessing where Salik should trade relative to these peers, investors may consider some of the following issues, some of which are addressed elsewhere in this report:
Corporate governance and minority shareholder protections
The long-term growth potential of the business
Business focus/revenue diversification
One key differentiator is the firm’s commitment to distribute 100% of its dividends. In contrast, the median payout ratio for our UAE peer firms list is 60%, while for global industry peers it is 48%. This income component, particularly when married to Salik’s top-line growth potential (see below), is likely to appeal to a broad range of investors.
At the AED2.00 per share issue price, the Dubai government is clearly hoping that investors will be using the dividend yield as their preferred valuation metric, as, on other measures, there are cheaper alternative investments.
6. Volume drivers point to further growth
Salik generates revenue primarily via the number of chargeable journeys that take place through its toll gates. Some of the key factors driving the number of such transactions are:
Population growth. At end-21, Dubai’s population of permanent residents was 3.5mn, while the Emirate's total daytime population was 4.5mn. As per the Dubai 2040 Urban Master Plan, the resident population is expected to swell to c5.8mn by 2040, ie 2.7% pa CAGR. The daytime population is expected to rise to 7.8mn over the same period – 2.9% CAGR.
Tourism. 25mn tourists are being targeted in 2025, up from 16.7mn in 2019 (ie 7.0% CAGR). This compares with historical growth from 2007 to 2019 of 7.6% CAGR. The amount of space dedicated to tourism activities is forecast to grow at 4.3% CAGR to 2040, while the length of public beaches is expected to grow 8% CAGR over the same period.
Rising car ownership. RTA forecasts indicate that the number of registered vehicles is expected to rise from 1.9mn in 2021 to 2.6mn in 2030 (ie 3.9% CAGR).
Increased private journeys. Rising local wealth levels could see the proportion of journeys taking place in private vehicles rising from the current 60% level. The Dubai 2040 Urban Master Plan focuses on developing five interconnected urban centres (Deira/Bur Dubai, Downtown/Business Bay, Marina/JBR, Expo, and Silicon Oasis). Journeys between these centres could rise, generating additional tollable journeys.
Additional toll gates. Salik is likely to add more toll gates to its network, which would bring more paid journeys under its umbrella. Historically, additional toll gates have materially added to toll revenues.
Lifting the proportion of paid journeys. Currently, c23-25% of traffic beneath Salik gates is not chargeable – comprising exempt vehicles (such as public transport, empty taxis and various public service vehicles, and private vehicles belonging to disabled individuals). The firm could look at ways to reduce this proportion in the future, while still respecting its ESG commitments.
From 2013-19, Salik’s net toll traffic increased by 5.5% CAGR, driven by population growth and rising economic activity. This compares to real GDP growth averaging 3.2% pa over the same period.
7. Pricing has scope to outpace inflation through dynamic pricing
We think it is highly likely that Salik price rises are on the way. Private vehicles are currently charged AED4.00 (US$1.09) for each crossing. This is cheap in a global context, particularly when the analysis factors in time savings; for some journeys, the time saved costs just AED0.5 per minute (ie US$0.14). Tolls are also cheap on a per-kilometre basis; Salik is considerably cheaper than comparable metropolitan tolls elsewhere, as highlighted below.
One other factor that emphasises the good value road travellers obtain from these tolls is the high quality of the UAE’s road infrastructure, which ranked first globally in a survey conducted by the World Economic Forum over the period 2013-18.
The company is allowed to ask for annual inflationary price increases, although the ultimate power to award such price changes rests with the Dubai government (via the RTA). The company’s own forecasts project a 5% price increase at the beginning of 2023, with annual 2% pa increases thereafter. We note that the UAE has relatively recently (from 2015) moved from a fixed fuel price regime to one that varies according to market prices. Local motorists have therefore become accustomed to driving costs not being fixed.
A much bigger delta from a pricing perspective comes from the possibility that Salik will have to introduce dynamic toll pricing, with journey costs varying according to the level of road congestion. Since most journeys take place during peak times, the application of dynamic/surge pricing for tolls should provide an additional mechanism for the firm to grow its top line. For example, in Toronto, Canada, peak time tolls are a 25% premium to normal rates. By weakening the attachment to a fixed pricing anchor, dynamic pricing should also make it easier for inflationary price increases to be passed through to the customer.
8. Additional revenue sources are likely to be limited
To date, toll revenues have accounted for c89% of Salik’s top line, with the balance generated from related fines and penalties. The firm has highlighted a few ways that its revenue pool could become more diversified:
Advertising revenues, both on toll gates and through the firm’s online and app-based products. We think the scope for this is small, given the limited area available for outdoor advertising, and the limited need for customers to regularly interact with the firm through electronic or other channels (the technology is robust and payments can be automated).
Monetising traffic data and insights, since Salik can compile detailed information on the movements of its customers within Dubai. Again, we see limited scope for this to meaningfully contribute to the firm’s revenues, given the small physical area for which Salik has information, the availability of rich alternative datasets (eg Google/Apple maps) and customer privacy considerations.
Consulting services to other governments and toll road operators. This could be the most lucrative source of alternative revenues, particularly if transactions can be structured so that Salik gains access to a stream of future revenues. However, as a traditional consulting model, we think the impact on company financials would be limited.
Overall, we would not put a high probability on these additional revenue streams making a material contribution to the top line. We note that the firm plans to increase its headcount from 43 individuals in 2022 to 59 in 2024. While some of this is likely related to the core toll business (eg additional toll gates and dynamic pricing), we suspect development efforts related to these new revenue streams are also driving this 37% increase.
9. Corporate governance protections are extremely important
Salik is very much a Government of Dubai entity. Its sits beneath the Traffic and Roads Agency of the RTA, which itself is a department of the government. A majority of the Board of Directors and senior management team are Emirati (including the Chairman and CEO). The company’s toll operator concession has been granted by the Government of Dubai, and decisions on pricing and location of toll gates will also be taken by the government. The assets on which tolls are levied, as well as the toll gates themselves, are operated and maintained by the government.
RTA organisational chart
There may be occasions when the interests of 80% shareholder – the Government of Dubai – and those of the remaining minority shareholders, diverge. The company is entitled to demand compensation for any adverse government action against it (such as discriminatory taxation or breaches to the concession agreement, eg changes in fee structures). Our concern is how that could be enforced without causing business disruption.
To provide shareholders with additional protection against adverse governmental actions, the company has formalised certain legal compensation structures:
Where a toll gate is removed, the company shall be granted 130% of the fair market value of the lost revenue stream;
Where the RTA terminates the concession agreement early due to company default, Salik shall be compensated to the tune of 70% of the market value of the tolling operations (less termination costs);
Where the RTA terminates the concession agreement for other reasons, Salik shall be entitled to compensation equivalent to 130% of the fair value of the tolling operations, plus termination costs.
One of the most important protections relates to the level of the concession fee payable to the Government of Dubai. This is initially set at 25% of sales but can fall to 15%. The level is automatically adjusted such that there is no value loss to shareholders if inflationary price increases are not fully sanctioned by the RTA. As well as protecting shareholders, this facility gives the Dubai government flexibility to protect consumers from the full extent of inflation, should it view this as being a desirable outcome.
Interplay between inflation adjustment and concession fee
Of course, enforcement of these conditions may need to be conducted through the Dubai courts, which adds a layer of uncertainty to the outcome. An additional complication is that UAE federal law may trump the Dubai laws under which these protections have been granted, although the circumstances under which this would be an issue are likely to be unusual.
The importance of the above protections is exacerbated by, in our view, Salik’s inability to viably exist as a fully independent entity. Salik is essentially a small company. It has few assets, and its full headcount numbers below 45 individuals. The RTA owns the intellectual rights to the toll system software, all physical toll infrastructure and the Salik brand. The firm’s ability to change prices, add new toll gates or make other material changes to its business requires permission from the RTA.
Salik organisational structure
We note that the firm's concession agreement with the RTA also has high service-level requirements. Any shortfall below a 99% delivery ratio requires Salik to pay compensation to the RTA equivalent to 25% of lost revenue. Given its limited resources, Salik may find it difficult to deal with unforeseen events, putting it at risk of breaching this 99% delivery threshold.
10. Salik's business model is subject to technological risk
We highlight below a number of trends that could, in combination, result in tollable traffic lagging overall economic activity in the future.
Increasing urban density, limited parking capacity and the increasing availability of alternative transport options could reduce the utility of private vehicles.
The growing prevalence of hybrid working would reduce the number of daily commuter journeys.
New technologies such as E-bikes and E-scooters for short journeys, and drones for deliveries, are emerging.
More sophisticated phone-based traffic guidance tools could help drivers avoid tolls when other routes provide similar journey times.
Car-pooling/ ride-sharing facilities are gaining traction – allowing users to reach where they want, when they want, at a fraction of a solo journey cost.
Competition from public transport is likely to rise. Ambitions to build an environmentally friendly, attractive place to live will require continued investment in mass transportation. For example, according to the RTA, Dubai Metro journeys are likely to grow by 4.8% pa to 2030.
11. Salik is not recession-proof but should be lower risk than most other firms
Salik's toll traffic was clearly affected during the pandemic, with the number of journeys in 2020 30% lower than in 2019. But traffic growth has also reflected the broader economic cycle, after adjusting for petrol price headwinds. This is clearly not a recession-proof business.
That said, it is likely that in a ‘normal’ economic downturn, Salik’s financial performance would be less affected than other investment alternatives. For example, if we look at the share price performance of our listed peer groups, we see that the shares are down only 3% year-to date, on a median basis. This compares with a c20% decline in global equity markets over the same period.
12. Potential to raise debt finance could turbocharge the dividend yield story
Salik has been granted an exclusive concession to operate toll gates on roads in the Emirate of Dubai. However, it does not have any responsibility for the maintenance of road or toll collection infrastructure, which lowers the complexity of the business and limits capex needs.
Instead, the company pays a concession fee to the government, this is currently set at 25% of net toll revenues, but this proportion can fall to 15% if toll price increases in line with inflation are not implemented annually.
One interesting feature of the business is its negative working capital position, as toll gate fees are typically paid in advance by the majority of users.
Salik enjoys a very high cash conversion rate; cash inflows are equivalent to 100% of EBITDA. Together with a relatively stable revenue base, this opens up the possibility of the firm raising debt to optimise its capital structure. Given the limited capex needs of the business, debt-raising would only make sense if the proceeds were to be used for acquisitions (or, more likely) to fund special dividends. Buy-backs would be sub-optimal, in our view, as they would either reduce the free float or lead to tension between the major shareholder and private sector investors.
The UAE is on a tear: how best to gain exposure to this economy (August 2022)
Financial performance of global listed toll road operators
Financial performance of UAE-listed non-financials
Valuation multiples of global listed toll road operators
Valuation multiples of UAE-listed non-financials
Board of Directors
Senior management team