Water Treatment & Services - Water runs dry
Recommendation: Neutral
We are negatively surprised by the new developments in the water industry, which suggest further delays in Puncak Niaga's RM1.6bn water deal and in the sale of Gamuda's 40%-owned Splash. The near-term outlook has become less attractive until the Selangor state and federal governments sort out the water asset transfer issues. We were too optimistic about an amicable solution and are disappointed about the lack of details. Although we do not believe the water restructuring plan will fail completely, we are now more cautious about timing. Due to delay risks, we downgrade the water sector to Neutral and Puncak Niaga from Add to Hold. We maintain Add on Gamuda as its construction outlook overshadows the overhang on the water asset sale.
What Happened
Press reports have highlighted the risk of delays in the progress of water restructuring plans in Selangor. Key factors: 1) While Puncak Niaga's water deal is at an advanced stage of the sale and purchase agreement, the state and federal governments are facing disagreements about the transfer of the ownership of water assets post the completion of water restructuring. 2) The state government is unlikely to allow the federal government to modify the master agreement signed last year. 3) The Selangor MB is still willing to proceed with the water deals but without any changes to the terms.
What We Think
We believe there are now signs that political hurdles are re-emerging despite the heads of agreement (HOA) signed between the state's previous MB and the federal government last year. This carries negative implications, i.e.: 1) Puncak's RM1.6bn water asset sale is likely to be delayed further, holding up the payment of special dividends (RM1/share or over 30% dividend yield), 2) Renegotiations on the sale of Gamuda's 40%-owned Splash could be put off for even longer. 3) Tenders for phase two of the Langat 2 water treatment plant (WTP) could be delayed as it requires the state's development order (DO).
What You Should Do
Although we downgrade Puncak Niaga from Add to Hold (we address this in a separate note), we do not believe the water restructuring plan will fail completely. We expect the near-term outlook to hinge on both sides of the government revisiting the master water agreement. However, this may take some time and cause an overhang to Puncak's deal.
Source: CIMB Daybreak - 11 March 2015
Recommendation: Neutral
We are negatively surprised by the new developments in the water industry, which suggest further delays in Puncak Niaga's RM1.6bn water deal and in the sale of Gamuda's 40%-owned Splash. The near-term outlook has become less attractive until the Selangor state and federal governments sort out the water asset transfer issues. We were too optimistic about an amicable solution and are disappointed about the lack of details. Although we do not believe the water restructuring plan will fail completely, we are now more cautious about timing. Due to delay risks, we downgrade the water sector to Neutral and Puncak Niaga from Add to Hold. We maintain Add on Gamuda as its construction outlook overshadows the overhang on the water asset sale.
What Happened
Press reports have highlighted the risk of delays in the progress of water restructuring plans in Selangor. Key factors: 1) While Puncak Niaga's water deal is at an advanced stage of the sale and purchase agreement, the state and federal governments are facing disagreements about the transfer of the ownership of water assets post the completion of water restructuring. 2) The state government is unlikely to allow the federal government to modify the master agreement signed last year. 3) The Selangor MB is still willing to proceed with the water deals but without any changes to the terms.
What We Think
We believe there are now signs that political hurdles are re-emerging despite the heads of agreement (HOA) signed between the state's previous MB and the federal government last year. This carries negative implications, i.e.: 1) Puncak's RM1.6bn water asset sale is likely to be delayed further, holding up the payment of special dividends (RM1/share or over 30% dividend yield), 2) Renegotiations on the sale of Gamuda's 40%-owned Splash could be put off for even longer. 3) Tenders for phase two of the Langat 2 water treatment plant (WTP) could be delayed as it requires the state's development order (DO).
What You Should Do
Although we downgrade Puncak Niaga from Add to Hold (we address this in a separate note), we do not believe the water restructuring plan will fail completely. We expect the near-term outlook to hinge on both sides of the government revisiting the master water agreement. However, this may take some time and cause an overhang to Puncak's deal.
Source: CIMB Daybreak - 11 March 2015
