LAST WEEK, Puncak Niaga Holdings Bhd’s shareholders approved the sale of its water concession business, which will bring in RM1.56 billion cash for the group.

Its exit from Selangor’s water concession segment will enable the group to diversify and expand, which may excite investors in the coming months.

But risks linger because Puncak’s board has yet to determine how it will invest the RM1 billion it received from the sale of water treatment operator Puncak Niaga Sdn Bhd (PNSB) — the group’s breadwinner — and distributor Syarikat Bekalan Air Selangor Sdn Bhd.

Analysts say they cannot predict the group’s prospects because it might take years to meet the 50% shortfall in earnings.

At Puncak’s EGM last Wednesday, executive chairman Tan Sri Rozali Ismail reiterated the group’s intention to venture into the plantation sector while remaining in the water, wastewater and environment engineering business and bolstering its oil and gas division. However, he did not commit to a concrete plan on how Puncak was going to spend the cash earmarked for investment.

A minority shareholder who attended the EGM told The Edge that he was undecided whether to keep the stock after the group has made its RM1 per share dividend disbursement. “I will have to wait and see what Puncak Niaga announces [on its business plan].”

Rozali assured the shareholders that Puncak would be careful about its investments. It took the group nearly a year to finalise the sale of Selangor-related water concessions, he explained, as it had to get proper valuations and assessments done on the likely impact of the sale on the group’s operations.

In June last year, Rozali agreed in principle to put an end to a six-year battle for control of Selangor’s water assets between the private concessionaires and the state government. In November, a deal was formally tabled at RM1.56 billion cash.

Acquirer Pengurusan Air Selangor Sdn Bhd, a wholly-owned subsidiary of state investment arm Kumpulan Darul Ehsan Bhd, is only taking over the state’s concessions and will allow Puncak to keep its other water businesses, such as its concessions in China and its construction arm.

“After the sale agreement, which is [expected] to be completed on Jan 16, we will have more time to look at investment opportunities,” Rozali told reporters after the EGM before joking that the group was previously busy tending to complaints about water service in Selangor.

He also revealed that the group has made overtures to plantation companies with assets in Malaysia. Currently, Puncak is evaluating the potential investment returns and valuations of these assets.

“With crude palm oil (CPO) price expected to soften further this year, the value of plantation estates will go down in tandem. Our top priority is to look at oil palm estates in Malaysia.”

Over the past year, spot CPO price has dropped nearly 8% to RM2,316.50 per tonne.

However, analysts are doubtful about Puncak’s decision to penetrate the sector, citing unattractive prospects and the group’s lack of expertise in the field.

CIMB Research plantation analyst Ivy Ng Lee Fang tells The Edge that if Puncak wants immediate earnings contribution from its plantation venture, it needs to acquire assets that are well managed.

“As for buying opportunities, it might find them in Sabah and Sarawak. Some assets have been acquired there over the past few years and the prices are cheaper too.”

She points out two recent notable acquisitions there: IOI Corp Bhd’s RM1 billion purchase of Unico-Desa Plantations Bhd and Felda Global Ventures Holdings Bhd’s takeover of Pontian United Plantations Bhd for RM1.22 billion. The estates of both the targeted companies are predominantly in Sabah.

Nevertheless, Rozali has said Puncak “will not put all its eggs in one basket”. So, it is anyone’s guess how much the group will spend on plantation assets. But according to Ng, RM1 billion acquisitions will only make the entity a small planter.

Unico-Desa’s net profit for its financial year ended March 31, 2013 (FY2013) — its final full year before it was acquired — was RM25.47 million while revenue was RM166.91 million. PNSB’s latest audited normalised profit after tax for its FY2013 ended Dec 31 was about eight times larger at RM234.37 million while revenue was RM684.41 million.

Another wild card is Puncak’s future acquisitions in the oil and gas sector. With crude oil prices down more than 50% since last year, there is no telling how the sector will fare, especially if oil producers cut their spending.

Rozali, however, remains unfazed because Puncak’s wholly-owned oil and gas subsidiary is involved in the service sector. “When oil prices drop, the companies don’t look at investing in exploration and production but they will continue to do maintenance and servicing so that they can maintain their assets,” he observed.

According to RHB Research Institute, Puncak Oil & Gas Sdn Bhd owns a derrick lay barge and has secured Package B of the Pan Malaysia integrated offshore installation contract worth RM1.8 billion for three years from 2014 to 2016.

AllianceDBS Research analyst Arhnue Tan agrees with Rozali that oil and gas service providers are shielded from falling oil prices because their contracts are locked in advance.

However, she remarks that a recent report that Petroliam Nasional Bhd plans to cut its operational expenditure by up to 30% does not bode well for service players as well. “This will result in a slowdown in activity.”

Another analyst comments that this could be an opportune time for Puncak to accumulate oil assets as they might be priced lower or there could be consolidation ahead to ride out the storm.

Rozali also told reporters that the group will remain in the water business and that it had talked to several Asean members on providing its services. But as AmResearch analyst Max Koh points out, Puncak’s concessions in China are still loss-making.

Still, another analyst says the stock will remain attractive until the ex-date for the bumper dividend of RM1 per share. On a fully diluted basis, the RM534.3 million earmarked for special dividend will translate into a 35.5% yield on the stock’s close of RM2.82 last Thursday. “Where else can you find a yield as big as that?” asks the analyst.

Rozali admitted that he was happy with the payout. After all, he owns 169.12 million shares or a 40.86% stake in Puncak.

This article first appeared in The Edge Malaysia Weekly, on January 12 - 18 , 2015.

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