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Water Treatment & Services - New hurdles to water takeovers?

Recommendation: Over Weight
The more pessimistic view on the fate of water takeovers in Selangor, as outlined by the Edge Weekly, surprised us. Nonetheless, we continue to maintain our positive view that the ultimate ownership of physical water assets will be sorted out separately following water operations divestments by the key players, namely Puncak Niaga and Gamuda. At this juncture, risks of further delays in Puncak's RM1.6bn deal is minimal, in our view, and we still expect the deal for Gamuda's 40%-owned Splash to resume in Mar-Apr. Findings from our recent channel checks suggest that the state government remains committed to concluding the water restructuring in 2015. We maintain Overweight on the sector.
What Happened 
An article in the Edge Weekly highlighted sources as saying that: 1) new issues involving the ownership of water assets are brewing between opposition-led Selangor and Barisan Nasional-controlled federal government, 2) the assets include major dams and pipe networks, 4) the state government argues that all water-related assets should belong to the state, and 5) this development could derail/delay Selangor’s water restructuring exercise. 

What We Think 
This news is a negative surprise but we are not too concerned about the potential impact on the progress of water restructuring in the state at this juncture. Findings from our recent channel checks still justify a more optimistic stance on the progress of water takeovers. Takeover negotiations regarding Puncak's RM1.6bn water asset divestment deal is still on the table, with the latest indications from management pointing to a likely conclusion within Feb 15, pending several conditions precedents (CPs) on the part of the state government. As for renegotiations on Splash (40%-owned by Gamuda), we continue to be hopeful that talks would resume in Mar/Apr 15 pending the completion of Puncak's deal. Our view is that the ultimate ownership of physical water assets will be sorted out separately following the takeover deals. 
What You Should Do 
Remain invested in Puncak Niaga, mainly due to the special dividends appeal, which translates to c.38% in dividend yield (RM1/share), likely to be paid out in 2H15, assuming that the deal completes by 2Q15. Timing of the resumption of Splash's deal could be clearer from Mar 15. We continue to expect all parties to agree on an alternative valuation that approximates 1 x BV, which should range between RM2.5bn to RM2.8bn.
Source: CIMB Daybreak - 04 February 2015
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