KUALA LUMPUR (July 30): CIMB Investment Bank Research has maintained its neutral outlook on the water treatment and services sector pending the official valuation for the Selangor state government to take over Syarikat Pengeluar Air Selangor (Splash).

In a research note today, CIMB research analyst Sharizan Rosely said while diminishing political risks post-GE14 may prevent water deals from failing, it is too premature to conclude that the valuation range of RM2.5 billion to RM2.7 billion as cited in a news report will be acceptable to the shareholders of Splash.

It was reported last Friday that the federal and Selangor state governments have agreed to a RM2.5 billion to RM2.7 billion price tag for the takeover of Splash.

"According to the latest news, the deadline for negotiations is now set for Aug 10," Sharizan said.

The news report did not provide any additional details of the valuation basis, but past takeover propositions used the one-time price-to-book value.

Quoting a source, the news report said the federal government has committed to fork out RM1.9 billion or 70% to 76% of the price tag, leaving the Selangor state government with RM600 million to RM800 million or 24% to 30% of the unconfirmed valuation range for Splash.

However, Minister of Water, Land and Natural Resources Dr Xavier Jayakumar refuted these claims of the federal government's involvement in the water deal.

Sharizan noted the last rejected takeover offer was in 2013, valuing Splash at RM1.8 billion in its entirety, comprising RM251 million equity value at 12% return on equity and RM1.6 billion asset value.

As such, the news may appear positive as the valuation range is over ten times the amount — RM251 million — that Splash's shareholders were supposed to receive from the last offer made in November 2013.

"However, the response by the water minister on Friday refuting the valuation top-up scenario by the federal government pours cold water on sentiments, in our view; the source of funding has been a major hurdle to the Selangor state's past takeover deals," Sharizan said.

He added that Gamuda Bhd's 40% stake in Splash may translate into RM1 billion-RM1.1 billion proceeds, or 41-44 sen per share.

"But we estimate a 15% to 19% downside to net profit ex-Splash with possibly no special dividends given capex commitments for the Penang Transport Masterplan (PTMP)," Sharizan said.