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.
