Puncak Niaga Holdings Bhd
(May 12, RM2.54)
Maintain hold with an unchanged target price (TP) of RM2.86: Puncak Niaga Holdings Bhd announced yesterday that it has received a request from Pengurusan Air Selangor Sdn Bhd (PASSB) for a fifth extension for the fulfilment of conditions precedent in the water deal. 

In a Bursa Malaysia filing, the company said that it will seek its board of directors’ approval for a decision. Recall that the fourth extension lapsed on May 11, 2015 (since the first stop date of Jan 12 for the conditions precedent to be fulfilled).

Puncak Niaga told the exchange that it has met all the conditions precedent and the delay is due to pending issues related to the transfer of assets between the federal and state governments. 

This is mainly related to a dispute in the ownership of assets at Bukit Nenas and Semenyih. In deliberating the extension, Puncak Niaga said there is a “high possibility” that the board may seek a higher price for the proposed disposals.

This is due to the following reasons: (i) The offer price of RM1.55 billion for the proposed disposal is based on 12% return of investment calculated until the end of financial year ended Dec 31, 2012 (FY12). As such, Puncak Niaga is not accorded with any returns for FY13 and FY14; (ii) Due to the delay, Puncak Niaga has to forego and has lost several investment opportunities in the past few months. Recall that Puncak Niaga intends to use approximately RM1 billion from the sale proceeds for its future business plans; (iii) The continued stalemate in the water deal has resulted in the inability of Puncak Niaga and Syarikat Bekalan Air Selangor Sdn Bhd to implement major plans to improve the treatment and distribution of water in the state since 2008; (iv) Puncak Niaga’s overseas investment cost has risen due to the depreciating ringgit against the US dollar. Likewise, operating costs have also increased following the imposition of the goods and services tax.

While we had expected a request for further extension (as both the federal and state governments have not resolved the dispute), we are surprised with Puncak Niaga’s announcement that it may seek a higher price for the disposal.

We opine that this may cause another setback for the restructuring exercise as it may be inconsistent with the terms stated in the master agreement. We maintain our numbers and fair value for now pending further clarity.

We maintain “hold” as Puncak Niaga’s future prospects hinge on the consolidation of the water exercise. — AmResearch, May 12

This article first appeared in The Edge Financial Daily, on May 13, 2015.