Water treatment and services sector
Maintain neutral: The floodgates are lifted as expected. New developments point to a restart of stalled water talks in Selangor. This eliminates political risk, but the focus now is on the speed of the takeovers. A slight negative surprise is the new timeline of July 2016 for full completion of water takeovers. 

Gamuda Bhd’s Syarikat Pengeluar Air Selangor Holdings Bhd (Splash) remains the last target asset. The state’s execution in the medium term is clearly focused on Puncak Niaga Holdings Bhd’s water assets. A more sustained rerating hinges on completion of the RM1.6 billion sale and purchase agreement (SPA).

On Tuesday, the federal and Selangor state governments signed four key agreements allowing for the resumption of stalled water asset takeover negotiations. While positive, it is largely within our likely scenarios for water developments this month. The energy, green technology and water minister said the master agreement can now take effect, and the SPA for Puncak Niaga’s two water businesses would be enforced to allow Pengurusan Air Selangor Sdn Bhd (Air Selangor) to take over Puncak Niaga Sdn Bhd (water treatment operations) and Syarikat Bekalan Air Selangor Sdn Bhd (sole water distribution operations). But the timeline has stretched to July 2016.

A slight negative surprise is the pushing of the timeline for overall completion to July 2016, with Gamuda’s 40%-owned Splash being the final targeted asset. Within the next five months, key execution targets are the Selangor government’s October 2016 target for the completion of Puncak Niaga’s deal, and the release of up to RM2 billion of funds from Pengurusan Aset Air Bhd (PAAB) (federal government) to Air Selangor to fund the takeovers, one more hurdle to cross for Puncak Niaga’s SPA. 

Our industry checks point to a more encouraging outlook for Puncak Niaga. However, a more sustained rerating hinges on Puncak Niaga’s announcement of no more extensions to the SPA timeline, and fulfillment of the conditions of the SPA. These should provide greater certainty of the timeline of the board-approved RM1 per share special dividend (37% yield).

A potential payout in the fourth quarter of 2015 is still within reach, in our view, provided it can finalise the SPA by the end of this month. This development is also positive for Splash as the state remains committed to a win-win deal. But the drawback is the continued uncertainty of an alternative new takeover and valuation structure by the state. The balance RM2 billion allocation from PAAB to Air Selangor is insufficient to match Splash’s targeted one times BV divestment value. We expect progress towards Splash following the completion of Puncak Niaga’s RM1.6 billion deal. 

Gamuda’s construction prospects remain attractive, backed by Mass Railway Transit Line 2 and the Penang Transport Master Plan.

While the mutual agreements at the government level are overall positive and should enable talks between the state and the water operators to resume, the restructuring efforts look likely to spill over into 2016. We will closely monitor the execution by the state government in the coming months. We remain “neutral” on the sector and keep Puncak Niaga as a “hold”. — CIMB Research, Sept 9

This article first appeared in digitaledge Daily, on September 11, 2015.