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Puncak Niaga Holdings Sdn Bhd
(Nov 12, RM3.60)
Maintain “add” with a target price (TP) of RM4.28:
Puncak Niaga is close to realising the Selangor state government’s RM1.6 billion in cash offer for both its water assets.

Tuesday’s conditional sale and purchase agreement (SPA) formalised the deal and the agreed valuations for Permodalan Negeri Selangor Bhd and Syarikat Bekalan Air Selangor Sdn Bhd.

A positive surprise was the board-approved RM1 per share special dividend spin-off to be distributed to shareholders next year: a 29% dividend yield. The asset divestment is expected to be completed in two months and will leave Puncak Niaga with sufficient cash to execute its oil and gas (O&G) expansion plans.

We retain our TP as our sum-of-parts has incorporated the offer price. Maintain “add”.

Formalisation of the SPA and confirmation of special dividends are key potential rerating catalysts.

Puncak Niaga remains our top pick in the water sector.

The group has set aside RM534 million from the total proceeds to be distributed to shareholders as special dividends. The deal is expected to be completed in 60 days (two months) from the SPA.The valuation principles, including the terms and conditions of the state government’s offer, are consistent with the earlier offer.

A positive surprise was the generous RM1 per share in special dividends (fully diluted) versus our expectations of 20 sen to 30 sen per share.

With balance cash proceeds of about RM1 billion, this deal is also positive for Puncak Niaga as it will allow the group to pursue the expansion of its O&G gas business via mergers and acquisitions, domestically and overseas, and beyond the existing transport and installation contract from  Petroliam Nasional Bhd. Surplus cash has also been earmarked for the working capital needs of its water frastructure construction segment.

Post-water asset divestment, Puncak Niaga’s profit will feature mainly its domestic O&G venture and the construction segment.

This excludes the pro-forma RM415 million gain from the disposal of the water assets.

We maintain our earnings per share forecasts pending the completion of the deal.

Accumulate in view of the board-approved special dividends, which translate to an attractive dividend yield of 29% and likely to be realised in financial year 2015 (FY15) as the deal should be wrapped up in the first quarter of FY15.

The share price has declined 8% from its 52-week high of RM3.71 in late June as investors were generally concerned about the implications of the political change in Selangor and the potential delays in the water takeover deal. — CIMB Bank Research, Nov 12

Puncak-Niaga-Holdings_theedgemarkets

This article first appeared in The Edge Financial Daily, on November 13, 2014.

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