Water treatment and services sector
Maintain neutral: According to The Edge Financial Daily, a high-level meeting between officials from the Federal and Selangor state governments had been set for last Thursday, pertaining to the long-standing impasse in Selangor’s water sector. Some issues that have to be ironed out include Selangor’s contribution towards the takeover of Syarikat Pengeluar Air Selangor Holdings Bhd (SPLASH) and the quantum of tariff hike slated for the state.

According to the article, it is worth noting that the SPLASH deal is unique to Selangor as other water consolidation exercises involved the Federal government (via Pengurusan Aset Air Bhd) buying over the assets without the state government’s participation. While there are not many details about the potential water tariff hike, sources said the Selangor government may fork out as much as 40% of the price tag for SPLASH.

Based on an independent valuation by an investment bank for the state government in 2015, SPLASH was valued to be worth anywhere between RM2.8 billion and RM3.2 billion (not known if this was based on discounted cash flow or book value [BV]). There is also talk that the independent valuation by Deloitte for the Federal government puts the figure in the region of RM3 billion. Using the split above, this implies that the state will need to pay anywhere from RM1.1 billion to RM1.3 billion while the Federal government forks out RM1.7 billion to 1.9 billion.

Details of SPLASH’s latest financials in the article showed that it booked a financial year 2016 net profit of RM294.5 million on revenue of RM434.7 million. Non-current assets as at March 2016 were RM5.6 billion, with current assets valued at RM325.7 million. Its current and non-current liabilities stood at RM1.5 billion and RM1.5 billion respectively. There were, however, no details on the current BV.

This development is good news for the long drawn-out takeover of SPLASH. It appears that both sides are targeting next month as the next big milestone to reach an agreement before the sale can be concluded. We concur that the quantum of the potential tariff hike will be a political issue but from the standpoint of the Selangor government, it is crucial for it to recover its capital expenditure from the acquisition and keep the water distribution operations post-restructuring.

We would not discount the possibility of special dividends from Gamuda Bhd, but the quantum would depend on the final price tag and if there would be an element of a haircut to the BV. For Taliworks Corp Bhd, the potential recovery of receivables from SPLASH (lump sum or staggered) is cash-enhancing while it will retain its recurring income from the operations and  management in Selangor.

Pending new developments and a new offer price for SPLASH, we retain our “neutral” call for the sector. Kumpulan Perangsang Selangor Bhd, which owns a 30% stake in SPLASH, is another direct beneficiary of the cash proceeds. — CIMB Research, March 16