This article first appeared in The Edge Financial Daily on August 6, 2018
KUALA LUMPUR: Gamuda Bhd, the biggest shareholder of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH), is said to be keen on accepting the Selangor state’s offer to buy out SPLASH’s water treatment assets at RM2.55 billion, although the price tag is slightly lower than one time their book value — the ideal valuation that it has wanted, according to industry sources.
Furthermore, sources said Gamuda’s 80%-owned unit Gamuda Water Sdn Bhd would continue to be the operation and maintenance (O&M) contractor for the SSP3 Water Treatment Plant. But the terms in the existing O&M contract would be renegotiated between the company and the state government.
The state’s offer once again casts the limelight on Gamuda whose share price has been bogged down by the government’s move to review the country’s infrastructure projects. The ball is seen to be in Gamuda’s court now. The construction giant’s board of directors would have to decide by Friday when the offer will lapse.
Gamuda’s major shareholder is the Employees Provident Fund with a 10.3% stake as at Aug 1. Gamuda controls a 40% stake in SPLASH, while Kumpulan Perangsang Selangor Bhd (KPS) owns 30%. Sweet Water SPV Sdn Bhd, a private vehicle of businessman Tan Sri Wan Azmi Wan Hamzah, owns the remaining 30% stake.
Water treatment forms a key part of Gamuda’s infrastructure concession business, including highway concessions that are housed under another listed entity, Lingkaran Trans Kota Holdings Bhd (Litrak). Gamuda has a 43.58% stake in Litrak.
The group’s infrastructure concession division saw its pre-tax profit drop 17% to RM342 million, while revenue grew 6% to RM508 million for the financial year ended July 31, 2017 (FY17). Excluding the one-off impairment of RM98.5 million on SMART’s expressway, the core pre-tax profit would have seen a 7% increase to RM440 million. Gamuda posted a pre-tax profit of RM924 million on a revenue of RM5.073 billion for FY17.
Naturally, being a state-owned unit, KPS will vote to accept the offer when SPLASH stakeholders meet on Thursday. As for Wan Azmi, he said last Friday when the offer was announced that the return on the offer was “reasonable”.
Should the deal materialise, Gamuda and Wan Azmi would receive a lump sum of cash instantly. The offer was announced by newly appointed Selangor Menteri Besar Amirudin Shari last Friday. The acquisition requires Pengurusan Air Selangor Sdn Bhd to make an upfront payment of RM1.9 billion upon signing the definitive agreement. The remaining RM650 million will be paid in instalments over a period of nine years.
The divestment of the 40% stake in SPLASH would earn Gamuda an instant cash payment of RM760 million and Wan Azmi RM570 million.
SPLASH is the concession holder of Sungai Selangor Water Supply Scheme Phase 1 and 3, which controls about 45% of the treated water supply in Selangor, Kuala Lumpur and Putrajaya.
The acceptance of the offer to take over SPLASH, the state’s largest water treatment concessionaire, would resolve the water impasse that started over 10 years ago in Selangor. The impasse has caused major water supply issues in Selangor, such as delays in water pipe replacement, worsening non-revenue water and capacity shortage.
Some quarters see the end of the water impasse as a catalyst for the water-related industry, in which many pipe manufacturers have suffered from idle capacity for years after large capital expenditures were spent. This will lead to more jobs and contracts for water-related companies.