FOLLOWING protracted negotiations with the Selangor and federal governments, Puncak Niaga Holdings Bhd’s (PNHB) board of directors on Nov 12 announced its support for the disposal of its stakes in two water assets — Puncak Niaga Sdn Bhd (PNSB) and Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) — to Pengurusan Air Selangor Sdn Bhd as part of the state’s water industry restructuring.

While PNHB expressed its intention to set aside RM534.34 million from the RM1.56 billion cash proceeds arising from the disposal as special dividends, there are concerns that shareholders may not be willing to adopt a long-term view on the group as it begins revamping its business.

“We are mostly concerned about the lack of earnings visibility following the sale of the water assets. Puncak has not gone into details regarding the possible venture into the plantation sector while its oil and gas division’s high expenses are still outpacing its revenues,” says an analyst with a bank-backed research house who covers the stock.

PNHB’s water division contributed RM275.45 million or 60% to total group revenue in the first half of its financial year ending Dec 31, 2014 (1HFY2014). It was the largest contributor to the group’s pre-tax profit, accounting for RM223.4 million while the oil and gas segment posted a pre-tax loss of RM11.1 million over the same period.

“With more than RM600 million in its coffers, coupled with the additional RM1.1 billion in disposal proceeds, financing new investments will not be a problem. However, the oil and gas business is highly capital intensive while new plantations have long gestation periods with minimal revenue contribution during the first few years,” the analyst adds.

An alternative would be for PNHB to acquire existing plantation businesses.

However, based on recent transactions of plantation land, buyers are expected to pay a steep price for such assets.

In a Nov 12 filing with Bursa Malaysia, PNHB says all options are still on the table. The group expects to use the proceeds for future investments, which have yet to be identified. It may pursue acquisitions, strategic collaborations, joint ventures or alliances, which may or may not be similar to its existing businesses.

To be fair, PNHB has not neglected its shareholders. The forthcoming dividend payout translates into RM1.29 per share, surprising many analysts who were expecting a lower figure. Some say the dividends are a highly enticing “exit offer” for minority shareholders to cash in and seek new investment opportunities elsewhere.

In a Nov 12 note, Kenanga Research analyst Iqbal Zainal highlights the concerns over PNHB’s impending business reorganisation.

“As the Selangor water assets contribute almost all of the group’s profit, there will be a very huge earnings vacuum for Puncak. Post-special dividend payout, we might consider reviewing our call and valuations with a downward bias as we cannot ascertain the group’s direction after the sale of its water assets,” he says.

According to Kenanga, should the disposal be completed as expected by 1QFY2015, its net income forecast for PNHB will be adjusted to RM52 million for FY2015, a far cry from the net income of RM260 million in FY2013 and RM106.39 million in 1HFY2014.

It is not known whether the new jobs secured from other segments will be enough to save PNHB from being classified a PN17 company following the water asset disposal, as water treatment and supply are considered the group’s core business. The potential earnings shortfall of hundreds of millions of ringgit could trigger the status, which would prompt PNHB to come up with a regularisation plan within 12 months.

On the other hand, PNHB’s existing oil and gas business is starting to emerge as a prominent player. Its wholly-owned subsidiary, GOM Resources Sdn Bhd, has a three-year transport and installation contract from Petroliam Nasional Bhd, and its sole derrick laying barge just commenced work in April.

Previous estimates indicated that the contract would contribute up to RM600 million per annum, which could potentially result in the division recording its first full-year profit by FY2015.

PNHB’s construction division is also gearing up for the RM544 million worth of jobs it has secured this year. The subsequent recognition of revenue over the next few quarters should help PNHB offset the loss of its water businesses next year.

The group is believed to be bidding for an additional RM1.1 billion worth of construction jobs. It is said to be one of the companies shortlisted for the supply of water pipes to the Pengerang Integrated Complex in Johor worth RM300 million, and it is also pre-qualified for an incinerator project in Kepong worth RM800 million.

While PNHB is certainly capable of executing projects and expanding its business at the same time, its resources are limited. New headwinds due to falling crude oil prices may also be a major risk for the planned expansion of its oil and gas business.

This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.

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