If industry talk is to be believed, Tan Sri Rozali Ismail, the chieftain of Puncak Niaga Holdings Bhd, will be negotiating the sale of his flagship company early this week with officials of the Selangor state government.
Will he throw in the towel at the price being bandied about or will he fight for control of the water sector?
According to research reports from CIMB Investment Bank and AmResarch, the state’s offer is likely to be between RM3.50 and RM4. That effectively values Puncak Niaga’s water assets at RM1.4 billion to RM1.6 billion.

This is much higher than the earlier offer of RM3.1 billion that the state made in February this year. However, the state’s offer did not include Puncak Niaga’s liabilities estimated at RM3.5 billion.

A year or two ago, such a low price would have been unthinkable. In fact, until recently, speculation was rife that Rozali had accumulated funds and was looking at launching a takeover of the water assets in Selangor. It cannot be determined if he has put in a proposal to Putrajaya, but according to those close to him, it is something that cannot be put beyond him.

In the meantime, will Rozali agree to the offer made by the state?

Puncak Niaga closed at RM3.18 last Thursday, but as at end-March this year, the company’s net assets per share stood at RM3.36. But included in the balance sheet is a sum of RM3.6 billion, stated as project development expenditure, that is disputed by some.

Nevertheless, most analysts have a fair value of about RM4 a share for Puncak Niaga, which is considerably lower than, say, a year ago, in line with the company’s depleting earnings.

For 1QFY2009, Puncak posted a meagre net profit of RM498,000 on the back of RM350 million in turnover.
Much of Puncak Niaga’s woes stem from the need for pipe replacement works, which require high capital expenditure. At present, non-revenue water in Selangor stands at slightly above 30%, which is considerably high. Non-revenue water refers to water that is treated but is lost or siphoned out before reaching paying consumers.

Non-revenue water was at an average level of 42.8% when Rozali and Puncak Niaga’s 70%-owned unit Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) took over the distribution operations from Perbadanan Urus Air Selangor Bhd (PUAS) in January 2005. With close to a third of the water produced unaccounted for or lost as non-revenue water, there are plenty of issues with Puncak, and its valuations are coming down sharply.

Apart than Syabas, which has the concession to supply treated water to Selangor, Kuala Lumpur and the federal capital of Putrajaya, Rozali’s other asset is water treatment company Puncak Niaga (M) Sdn Bhd (PNSB).

PNSB was awarded a concession to operate, maintain, rehabilitate and manage the existing 27 water treatment plants in Selangor for 26 years starting from December 1994. This would mean there are only some 11 years left before PNSB’s concession ends.

An industry player points out that other treatment companies, such as Syarikat Pengeluar Air Sungai Selangor Holdings Bhd (SPLASH), are more valuable as they have a longer concession period than PNSB’s.
Having a concession with a depleting life span does not put Rozali in a very good position if the concession is valued based on the discounted cash flow method, which takes into account the future value of the asset.

Syabas, meanwhile, took over the functions of PUAS in early 2005, after it was given a 30-year concession for the supply and distribution of water to Selangor, Kuala Lumpur and Putrajaya.

Rozali could haggle and get to carry out maintenance and operations of PNSB, but it seems almost certain that he will have to let go of Syabas, either to the state or federal government.

This is because both the state and federal governments are under pressure to ensure tighter governance in the capital expenditure incurred by Syabas currently.

Valuing Puncak
At its close of RM3.18 last Thursday, Puncak Niaga had a market capitalisation of RM1.3 billion. Rozali’s 41% or 168.8 million shares had a market value of RM536.8 million. At the higher end of the offer of RM4, his share would be RM675.2 million.

However, recent transactions in PNSB and Syabas point to a higher valuation for Puncak Niaga.
In a deal concluded in October last year, Arena Tekad Sdn Bhd sold 17.5% in PNSB to Puncak Niaga for RM320.2 million. Thus, PNSB would have a valuation of RM1.8 billion.

At end-December last year, Kumpulan Darul Ehsan Bhd (KDEB), the Selangor investment arm, had sold 15% of Syabas to its 60.7%-owned unit Kumpulan Perangsang Selangor Bhd (KPS) for RM200 million. This values the whole of Syabas at about RM1.3 billion as at end last year, and Puncak Niaga’s 70% equity in Syabas at RM933 million.

But it must be noted that in the KPS deal, it was also given the first right of refusal to build the RM5 billion Langat 2 water treatment plant. Nevertheless, leaving the carrots out of the equation, Puncak Niaga would have a value of about RM2.7 billion.

And this is excluding the operations in Banten, Indonesia, and the foray into China under Singapore company Sino Water Pte Ltd, in which Puncak has an 80% stake and in which seven water-related projects have been earmarked.

If Puncak Niaga’s value is taken at RM2.7 billion, it will be twice the value of its current market capitalisation.
It must also be remembered that Rozali has fended off integration plans previously. In 2002, he scuttled plans for the integration of the water sector between his company, SPLASH, and Konsortium Aliran Bekalan Air Selangor Selatan Sdn Bhd (commonly known aas Konsortium Abass), with each being given its own areas to operate under PUAS. Syabas ended up taking over PUAS’ duties, while the other two companies ended up selling treated water to Syabas.

However, the operating environment has changed with the Pakatan Rakyat government controlling Selangor, and much of Rozali’s influence in the decision-making process has eroded.

The end of the road?
What lies in store for Rozali if he exits Puncak Niaga is a million-dollar question.

He is likely to exit his other cash-strapped vehicle, WWE Holdings Bhd (previously Waste Water Engineering Holdings Sdn Bhd), which is a PN17 company. He has about a 31% equity, largely held via Peribadi Johan Sdn Bhd. Late last year, an annoucement was made to  to Bursa Malaysia that Seribu Emas Bhd would be taking over the business of WWE, meaning that Rozali is likely to bow out.

Another company he has substantial equity in is TRIplc Bhd (formerly known as U-Wood Holdings Bhd), where he has a 8.3% stake, while his brother Datuk Mat Hairi Ismail, hold 5.5%. TRIplc has its mainstay in wood and timber products. It is also a PN17 company.

Both WWE and TRIplc’s shares are no longer traded.

More than a year ago, Rozali ventured into the oil and gas sector and had admitted that his forays were partly to prepare for the possibility that he may lose the water business. He emerged as a substantial shareholder in Mesdaq Market-listed oil and gas player Daya Materials Bhd but according to Daya Materials’ latest annual report, he only has about 0.5% or 2.5 million shares.

Puncak Niaga had also, in March 2006, set up an oil and gas unit, its 70%-owned Puncak Oil & Gas Sdn Bhd, “to explore business opportunities in the oil and gas industry, both locally and abroad”. Privately held Damini Corp Sdn Bhd controls the remaining 30% equity in Puncak Oil & Gas.

There are also those who feel that since he has experience in property development, he may get back into it with the same fervour he has shown in his water business.

Rozali’s early days
Rozali started out as a legal adviser with the Urban Development Authority in 1981 and after a two-year stint, joined Bank Islam, where he was instrumental in setting up Islamic banking in the country.

Then in 1987, he set up his own legal firm, specialising in corporate, banking and property development. After a seven-year spell as a lawyer, he moved on to start his property development business. His initial forays involved property development company Puncak Alam Housing Sdn Bhd, his family company which developed Bandar Baru Puncak Alam.

Rozali first emerged in the corporate scene in a significant way as the managing director of two property development companies, Talu Corp Sdn Bhd and Selegie Tower Sdn Bhd. Both were developing portions of the RM400 million Subang International Light Industrial Park. This was back in 1994.

Then, the talk was that Rozali was looking at listing some assets. He was largely perceived as an upcoming corporate player. He is also understood to have been involved in such plans as setting up a zoo in Batang Kali, Selangor, undertaken by Datra Holdings Sdn Bhd.

He was also reported to be looking to take over Asian Pac Holdings Bhd (formerly Pegi Malaysia Bhd) as his property arm, but the deal did not materialise.

In the mid-90s, Rozali, through his private vehicle Corporate Line, was involved in many Federal Land Development Authority (Felda) projects, such as Muna Jaya Development Sdn Bhd, which teamed up with Land & General Bhd on property development projects in Sungai Buaya, Selangor. This was in 1995.

About that time, he also emerged in privately held timber player Veracity Corp Sdn Bhd, with one Mohamed Radzi Bosiron. Veracity was a takeover target of Kelanamas Industries Bhd but the deal did not materialse.

Another vehicle where he was the executive chairman was Merge Power Sdn Bhd, also a property development company.

However, after PNSB and Syabas, his main thrust has been in water. And these water concessions have certainly enriched Rozali. According to a local magazine, he was the country’s 39th richest individual, with an estimated wealth of some RM225.3 million as at end last year. Since then his net worth has increased.
What he does with his payoff by the state and his accumulated business acumen, will be of great interest to Corporate Malaysia.

This article appeared in the Cover Story page of The Edge Malaysia, Issue 759, June 15-21, 2009.