Puncak Niaga Holdings Bhd
(July 13, RM2.73)
Upgrade to buy with a higher target price (TP) of RM3.80: The federal and Selangor governments signed a supplementary agreement on the proposed consolidation of the state’s water industry last Friday. This, in our view, helps to overcome the final hurdle for Puncak Niaga to dispose of its water-related assets and operations.  The supplementary agreement was to complement the water restructuring master agreement signed initially on Sept 12, 2014. 

Official details are scant at this juncture. KiniBiz reported that this new agreement  allows the proposed consolidation to be implemented without the Selangor government giving up its land, while complying with the requirements of the Water Services Industry Act 2006. We believe this  implies that the state government will claim ownership of the land on which the Semenyih and Bukit Nanas water treatment plants are  situated. 

We are glad to see light at the end of the tunnel after eight years of  negotiations.  With the federal and state governments sorting out their differences, we believe Puncak Niaga’s proposed disposal of its water-related assets and operations will be finalised in due course. 

According to the supplementary agreement, the exercise will have to be completed within 60 days. 

On a side note, our channel checks indicate that the federal and Selangor governments could revive the shelved takeover of Syarikat Pengeluar Air Selangor Holdings Bhd (Splash). We believe this could imply an improved offer for Splash’s existing shareholders, Gamuda Bhd (“neutral”, TP: RM5.35) and Kumpulan Perangsang Selangor Bhd (“not rated”), which hold a 40% and 30% stake, respectively, in the unit. 

In view of the  weakness in global crude oil prices, we take the opportunity to slash our financial year 2015 (FY15) to FY17 (estimates) earnings per share by 24% to 40% by factoring in lower contribution from its RM1.8 billion Package B Pan Malaysia integrated offshore installation contract. 

We are hopeful  the takeover will be expedited to put an end to Puncak Niaga’s monetisation of its water assets and operations. We upgrade our call to “buy” (from “neutral”), and lift our TP to RM3.80 (from RM2.61) despite our earnings revision, as we remove the 35% discount previously pegged to Puncak Niaga’s sum-of-parts valuation. — RHB Research Institute, July 13

This article first appeared in The Edge Financial Daily, on July 14, 2015.