- Maintain HOLD on Puncak Niaga Holdings with a higher fair value of RM2.41/share (from RM1.55/share previously), based on a lower discount of 50% to its estimated breakup value of RM4.83/share.

- The lower discount (previously: 70%) mainly takes into account some fresh progress on the long-standing restructuring of Selangor’s water industry.

- Our fair value has also been tweaked to take into account: (i) a proposed RM165mil Convertible Sukuk with up to 41 mil free warrants (1-for-10); and (ii) the de-consolidation of results from 70%-owned unit, SYABAS. The latter has no implications in our cash flow projections.

- As with other water-related stocks, the share price of Puncak rallied 25% in two days after news broke out that the Federal government had consented to the Selangor government’s move to take-over water assets in the state.

- The Selangor government has set a timeline by year-end to conclude it. Furthermore, Selangor Mentri Besar Tan Sri Khalid Ibrahim was reported to have said yesterday that the state government may give its blessings for the proposed Langat 2 project, provided the price is right.

- While we see these latest developments as a positive step forward, we still believe it is a little pre-mature to turn fully constructive on Puncak, and the water sector as a whole.

- Firstly, we believe all parties need to achieve consensus on valuations despite receiving the endorsement at the Federal level. Notably, Selangor’s water industry remains fragmented with ownership by multiple private entities.

- Secondly, it is uncertain if there would be a new offer tabled by the Selangor government, and at what price and terms. Recently, the state-led RM9.6bil takeover offer for the state’s four private water entities just days before the general election on 5 May, 2013 had failed to take off.

- Thirdly, another valuation hurdle may come in the form of pricing for the physical water assets owned by the Selangor government (e.g. pipelines, reservoirs) - and how it would be funded.

- Fourthly, we wonder if both the federal and Selangor governments can agree to the pricing of Langat 2 – and its implications on future water tariffs – before negotiations on the water restructuring issue are concluded.

- Until more concrete details on key valuation parameters are attainable, we maintain our HOLD rating on Puncak. Timing and political risk remains as key issues.

Source: AmeSecurities