KUALA LUMPUR (Aug 23): AmInvestment Bank believes Gamuda Water, Gamuda Bhd's 80%-owned plant operation and maintenance (O&M) operator, will accept Selangor's new O&M agreement for the Sungai Selangor Water Treatment Plant Phase 3 (SSP3) following the acquisition of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash).

According to the offer, made via Pengurusan Air Selangor Sdn Bhd, the existing O&M agreement between Gamuda Water and Splash for SSP3 will be terminated, while the settlement amount owed by Splash to Gamuda would be settled via instalments.

The offer includes a new O&M deal at revised bulk-water supply rates (BSR) of 44 sen/m³ (up until 2018), 46 sen/m³ (2019 to 2022), 47 sen/m³ (2023) and 53 sen/m³ (2024 to 2029).

This represents about a 2 sen/m³ reduction in comparison to the rates under the existing SSP3 O&M agreement, according to AmInvestment Bank in a note today.

Nevertheless, the research house expects Gamuda Water to accept the offer, as its estimates show that the effective "haircut" from the revised BSR to Gamuda Water's profit before tax (PBT) is only at about RM7.4 million.

This would shave the estimated Gamuda Water's annual PBT of RM60 million by only 12%, it said.

Its parent Gamuda's effective share of the "haircut" is only RM5.9 million at the PBT level, based on its 80% stake in Gamuda Water, it added.

By accepting the offer, Gamuda Water will effectively lock in decent recurring incomes for the next 11 years, the research house added.

Hence, it views the latest development as a "big positive" compared to earlier concerns about the prospect of Gamuda Water possibly losing the SSP3 O&M contract altogether.

Still, the research house remains cautious on the outlook for the local construction sector as the government cuts back on public infrastructure projects on grounds of fiscal prudence.

"While the rollout of public infrastructure projects will resume over the medium term as infrastructure development remains key to nation-building, we believe the focus will shift to smaller scale basic infrastructure projects such as road upgrading, bridges, schools, drainage, rural water and electricity supply, and smallish sewerage schemes, from multi-billion mega projects.

"The smaller projects are less economical to large contractors such as Gamuda, given their high fixed overheads," it noted.

The prolonged downturn in the local property market also weighs on Gamuda's property division, and there is uncertainty arising from the potential expropriation of Gamuda's toll roads, it added.

Hence, AmInvestment Bank is maintaining its 'hold' recommendation on Gamuda, with a lower fair value of RM3.34.