This article first appeared in The Edge Malaysia Weekly, on April 4 - 10, 2016.

KUMPULAN Perangsang Selangor Bhd’s (KPS) acquisition of a majority stake in Smartpipe Technology Sdn Bhd will put it in a good position to benefit from projects to reduce non-revenue water (NRW) in the Klang Valley and Putrajaya by the state and federal governments.

The investment in the water piping solution specialist will give state-owned KPS a core business, one that the group can rely on to secure contracts in water pipe replacement and rehabilitation across Selangor and other parts of the country.

The federal government plans to invest RM12 billion for water treatment and distribution assets in the country over the next five years, while Selangor is spending RM800 million to build two water treatment plants, with construction to start this year.

Although KPS might not be able to take up the entire RM800 million worth of projects, the group can bid for parts of the water treatment plants and distribution system, such as the water mains, drains and sewers.

After the disposal of its stake in Konsortium ABASS Sdn Bhd to the state government, KPS was left with its hospitality business and investment holdings, namely a 30% stake in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd and a 20% stake in Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd.

KPS disposed of its 90.83% stake in Titisan Modal (M) Sdn Bhd to Kumpulan Darul Ehsan Bhd (KDEB) for RM78.05 million, incurring a loss on disposal of RM32.5 million in FY2015. Titisan Modal owns Konsortium ABASS.

KPS’ hospitality business did not do that well last year, as the group closed down Brisdale Hotel and Quality Hotel Shah Alam for renovation. Besides these two hotels, KPS also owns Quality Hotel City Centre in Kuala Lumpur.

For the financial year ended Dec 31, 2015 (FY2015), KPS’ registered revenue of RM85.1 million, compared with RM87.7 million in the previous year, mainly due to lower revenue from its hospitality business and investment holdings.

KPS made a net profit in FY2015 of RM55.3 million, which dropped by more than half from the RM155.57 million recorded in FY2014, mainly due to the loss on disposal of RM32.5 million on the sale of Titisan Modal.

To recap, KPS, through its subsidiary Nadi Biru Sdn Bhd, entered into a shareholders’ agreement with Smartpipe Holdings Sdn Bhd for the subscription of a 51% stake for RM5.1 million.

The investment in Smartpipe will allow KPS to bid for the rehabilitation of water mains, drains and sewers in the state, and elsewhere. Smartpipe’s main business is marketing, selling and installing water pipes through a partnership with Dutch company Wavin Overseas BV.

KPS will also be able to participate in NRW solutions projects in the country. The NRW level in Malaysia is high at 38% on average in 2011, according to government data, compared with Singapore, which has maintained it at 5% over the last two decades.

“The establishment and execution of the NRW reduction programme under federal government and Selangor state initiatives and the unique selling points of Wavin’s products… could potentially shore up Smartpipe order book for the next five years,” states KPS in the announcement.

“According to Malaysian Water Association, in an article published in a local newspaper on April 2015, there is significant value to be unlocked in the NRW market since there are some 44,000 km of pipes in need of replacement throughout Malaysia,” it adds.

On its books, KPS only has RM30 million of borrowings, compared with RM1.25 billion in 2014, as the disposal of its stake in Konsortium ABASS as well as a 30% stake in Syarikat Bekalan Air Selangor Sdn Bhd took away the debts as well. Cash and bank balances stood at RM92.6 million.

The group’s net asset value per share stood at RM2.48 as at Dec 31, 2015. KPS traded at RM1.08 per share last Friday. The low valuation, coupled with the possibility of its stakes in associate companies being bought over, makes KPS an interesting stock to watch.

At its close of RM1.08 per share last Friday, KPS had lost 27% of its market value over the last one year. It is trading at a price-to-book value of barely 0.44 times, compared with 1.59 times for Mitrajaya Holdings Bhd and 1.01 times for Ahmad Zaki Resources Bhd.

At the moment, KPS’ jewel in the crown is its 20% stake in Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd, the concession holder of Sprint Highway, as well as a 30% stake in SPLASH.

In FY2015 ended Dec 31, KPS’s share of associates’ profits was RM111 million, lifting the group into the black, despite an operating loss of RM48 million. This, however, was lower than the RM149.98 million share of associates’ profits in FY2014.

However, with the state government adamant about taking over all water assets in Selangor, KPS may be expected to sell its stake in SPLASH eventually. The takeover of SPLASH is still ongoing and an independent valuer is working on an estimate of the price.

Thus, the water pipe replacement and rehabilitation business could be a way for KPS to continue to get a slice of the action in the state’s water industry even after losing its stake in SPLASH. The shareholders of SPLASH were offered about RM250 million by the state government. However, Gamuda Bhd, which owns a 40% stake in SPLASH, says it is worth at least RM2.8 billion.  This would value KPS’s 30% stake at RM840 million, which would comfortably allow the group to venture into new businesses or take on bigger contracts.

Nevertheless, Malaysia is not short of water pipe manufacturers and installation providers. JAKS Resources Bhd, Engtex Group Bhd and YLI Holdings Bhd are among the more established names in the industry.

Notably, JAKS Resources has a joint venture — Integrated Pipe Industries Sdn Bhd — with KDEB, the Selangor’s government investment firm, for manufacturing mild steel pipes. KDEB is KPS’s largest shareholder with slightly more than 55%.

With KPS partnering Wavin via Smartpipe, there is some uncertainty with regard to the structure of Selangor’s water pipe businesses.

Will KPS buy out KDEB’s stake in Integrated Pipe Industries, and thus have two technical partners in the water pipe business? Or will KPS’ Smartpipe take over JAKS’ stake in Integrated Pipe Industries, and keep it all in the family? 

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