- The Star reported today that Kumpulan Darul Ehsan Bhd (KDEB), Selangor’s investment arm, is hopeful of a resolution for the takeover of Selangor water assets by year-end.

- Its president Suhaimi Kamaralzaman was quoted as saying that KDEB would step in to make a new offer when both the federal and state governments come to an agreement on the structure and framework of the takeover.

- Nevertheless, he noted that the takeover would likely be priced the same as the previous and fourth offer, amounting to RM9.7bil in total.

- The news further reaffirms our optimism of a concerted effort by all parties to reach a concrete solution by year-end. In recent months, both the federal and state government has affirmed their intention of concluding a deal soon.

- Suhaimi said the new deal would be similar to the terms of the previous and fourth offer:- (i) based on a 12% return-on-equity component; and (ii) water assets to be assumed.

- According to Suhaimi, the equity contribution plus 12% ROE amounted to RM2bil, while the remaining RM7.7bil is for the “water assets, which were equivalent to the liabilities to be assumed”, including government loans and bonds.

- Following the consolidation, the state will hold all the water concessions through a special purpose vehicle, while the assets would be assumed by Pengurusan Aset Air Bhd (PAAB), a wholly-owned unit of Ministry of Finance Inc.

- The state government would then lease the assets from PAAB and operate with a service license.

- With these new developments toward the resolution of the water impasse, we maintain OVERWEIGHT on the water sector.

- We have a BUY on Puncak Niaga with a fair value of RM4.02/share, based on a 40% discount to its NAV. We also estimate Kumpulan Perangsang Selangor Bhd’s (KPS) implied value at RM2.54/share, based on a 40% discount to its break-up value of RM4.23/share.

- Our valuations are based on:- (i) KDEB’s fourth and previous proposal in February, and (ii) offers are net of debt.

Source: AmeSecurities