- Interest on water-related stocks spiked up on Bursa Malaysia yesterday following reports of a fresh breakthrough in Selangor's protracted water restructuring initiatives. This resulted in the share prices of Puncak Niaga Holdings, Kumpulan Perangsang Selangor and Gamuda gaining between 1%-14%.

- The renewed optimism followed local reports of Selangor Mentri Besar Tan Sri Khalid Ibrahim receiving a letter from Prime Minister Datuk Seri Najib Tun Razak agreeing to the water assets takeover deal.

- In a letter dated 29 June 2013 to the Selangor government, Najib was believed to be "open and ready" to discuss the water issue.

- We understand that the Selangor government has set a timeline by year-end to conclude the restructuring process. The four private water entities under the radar are Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS), Puncak Niaga Sdn Bhd (PNSB), Konsortium Abass Sdn Bhd (K.Abass) and Syarikat Pengeluar Air Selangor Holdings (SPLASH).

- SYABAS is 70% owned by Puncak, with the Selangor government through KDEB holding the balance 30%. PNSB is a 100%-owned unit of Puncak while K.Abass is 55% owned by KPS. SPLASH has three shareholders; i.e. Gamuda (40%), KPS (30%) and The Sweet Water Alliance (30%).

- While we view this latest development as a positive step forward, we believe it would be a little premature to turn constructive on the water sector in the near-term after numerous false starts in the past.

- Firstly, we believe all parties need to achieve consensus on valuations despite receiving the endorsement at Federal level.

- This would likely involve state-backed Pengurusan Aset Air Bhd (PAAB) agreeing to the valuation parameters to facilitate the funding options for consolidation process under the new water framework. Secondly, another valuation hurdle may come in the form of pricing for the physical water assets owned by the Selangor government (eg pipelines, reservoirs) - and how it would be funded.

- Thirdly, it is uncertain if there would be a new pricing offer tabled by the Selangor government , and at what terms. The Selangor Government’s most recent RM9.6bil takeover offer for the state’s four private water entities just before the 13th general election failed to take off.

- Fourthly, we are equally unsure how the unresolved status of the Langat 2 project would stack up in the water consolidation talks.

- As such, we maintain our NEUTRAL weighing on the water sector pending more concrete details on key valuation parameters (eg pricing). Similarly, Puncak is retained as a HOLD.

Source: AmeSecurities