Warrants Update: Windfall from water assets may lift Puncak-WB

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PUNCAK Niaga Holdings Bhd’s disposal of its water assets will give rise to a windfall special dividend that investors should take advantage of, say analysts.

On Nov 12, the group finally signed a conditional sale and purchase agreement with Peng­urusan Air Selangor Sdn Bhd, a wholly-owned subsidiary of Selangor’s investment arm Kumpulan Darul Ehsan Bhd. Puncak Niaga will sell its wholly-owned subsidiary Puncak Niaga (M) Sdn Bhd for RM1.55 billion, along with its 70% stake in loss-making water distributor Syarikat Bekalan Air Selangor Sdn Bhd and redeemable convertible unsecured loan stocks worth RM212 million.

The RM534 million set aside from the sale proceeds for distribution to shareholders translates into a dividend payout of RM1.29 apiece on a fully diluted share base of 534.6 million. This implies a 37% yield based on Puncak Niaga’s RM3.47 close last Wednesday.

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In anticipation of the payout, the company’s shares and warrants were actively traded. The mother share jumped 4.35% to close at RM3.60 on Nov 12 while the company-issued warrants gained 5.33% to RM2.57 after the disposal was announced.

Puncak-WB, which has a strike price of RM1, is convertible into ordinary shares on a one-to-one basis and matures on July 20, 2018, closed at RM2.43 last Wednesday, representing a 1.15% discount to the mother share.

However, more clarity is necessary as with the disposal of its water assets, Puncak Niaga will be without a core business and could be classified a cash company and thus given a Practice Note 17 status.

“We maintain our ‘hold’ call on Puncak Niaga until we see further clarity on the group’s future business plans,” says AmResearch, which has a RM3.40 target price on the stock.

Puncak Niaga intends to use RM1 billion from the sales proceeds for investments that could include an expansion into the oil and gas sector. The proposed sale is expected to be completed in the first quarter of next year.

“With balance cash proceeds of around RM1 billion, this deal is also positive for Puncak Niaga as it will allow the group to pursue the expansion of its oil and gas business via M&A at home and overseas, beyond the existing transport and installation contract from Petroliam Nasional Bhd,” CIMB Research says in a Nov 12 note. It has an “add” recommendation and target price of RM4.28.

In theory, if Puncak Niaga rises 23.3% to RM4.28, Puncak-WB should be worth 35% more at RM3.28, assuming zero premium to the underlying share.
The consensus target price is RM4.33 at the time of writing with 83.3% of analysts recommending a “buy” and 16.7% a “hold”. There were no “sell” calls.

This article first appeared in The Edge Malaysia Weekly, on November 24-30, 2014.