-  We expect Kumpulan Perangsang Selangor Bhd (KPS) to realise its latent value following renewed talks for the acquisition of water assets in Selangor. After applying a 40% discount to KPS’ NAV of RM4.23/share, it has an implied value of RM2.54/share.

-  Along with our upgrade of the water sector from NEUTRAL to OVERWEIGHT, we believe there will be further upside for KPS if the water consolidation exercise follows through.

-  Our break-up value of RM4.23/share takes into consideration KDEB’s last takeover offer for KPS’ water assets, the sale of a 57% stake in Kumpulan Hartanah Selangor Bhd (KHSB) to KDEB for RM213mil, and KPS’ remaining assets and businesses (see table 2).

-  If the last offer still stands, KPS is set to gain RM1.5bil from the sale of its stake and assets (assuming net liabilities) in SPLASH and Konsortium Abass. KPS currently holds a 30% stake in SPLASH and a 100% stake in K.Abass (via 91% unit Titisan Modal).

-  Note that the group is also currently disposing of its 57% stake in KHSB to KDEB for RM213mil cash or 83.6sen/share. KPS would pay out 46% or RM99mil of total proceeds as special dividend or net 20sen/share to KPS shareholders, implying a yield of 11%.

-  Following the two disposals, KPS might look at new core businesses in the future as it would only be left with its hospitality, O&G, and telco businesses.

-  However, its telco and O&G (on an associate level) are still loss-making and earnings visibility is still uncertain. Meanwhile, its hospitality business (three hotels and one golf course) recorded operating loss of RM6mil last year.

-  KPS is also redeveloping its Templer Golf Club with SP Setia into a mixed development. KPS will get a sum of 13% of gross sales value of RM1.1bil or a minimum payment of RM140mil.

-  Note that prior to the 12th GE in 2008, KPS received the mandate to spearhead water consolidation efforts in Selangor and to build Langat 2. It is still uncertain if the mandate still stands as KDEB indicated plans to form an SPV to manage the take-over while three other contractors were shortlisted to build Langat 2 in March.

-  If KDEB were to form an SPV, KPS will no longer hold any water assets or the license to operate and maintain them. If the original 2008 were to follow through, we might see a rerating catalyst for KPS.

-  KPS is currently trading at a 57% discount to its NAV of RM4.23/share.

Source: AmeSecurities