Construction sector
Maintain overweight with Gamuda Bhd as top pick: The federal and Selangor state governments signed a supplemental water agreement last Friday, which is an addition to the master agreement inked on Sept 12, 2014. 

The supplemental agreement clarifies some asset ownership issues, which include allowing the water restructuring exercise to proceed without Selangor giving up its land, while still complying with the requirements of the Water Services Industry Act 2006. The signatories have 60 days to complete the master agreement. 

To recap, the terms of the master agreement entail Pengurusan Air Selangor Sdn Bhd acquiring Syarikat Bekalan Air Selangor Sdn Bhd, Puncak Niaga Sdn Bhd, Konsortium Abass Sdn Bhd and Konsortium Air Selangor Sdn Bhd, but exclude Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash).

This marks a positive step towards concluding the Selangor water impasse. The implications are the Selangor state government will provide full support to the Langat 2 project and commit to focus efforts in improving water supply services, including reducing non-revenue water (NRW), and both governments should also resume negotiations on the acquisition of Splash (40% owned by Gamuda). A conclusion before the end of this year could be a target.

Beneficiaries: i) Puncak Niaga Holdings Bhd (non-rated), re-featuring as an attractive yield play as it intends to pay out RM534.5 million (RM1 per share) as dividends from its RM1.5 billion proceeds; ii) Gamuda, as the valuation of Splash sale should be higher on a willing-buyer, willing-seller outcome; iii) water infrastructure contractors (Salcon Bhd, Jaks Resources Bhd, George Kent (M) Bhd), NRW specialist (Salcon) and water pipe producers (Engtex Group Bhd, YLI Holdings Bhd) in the medium term. — Maybank Investment Bank Research, July 13

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