- The Edge Financial Daily reported that Puncak Niaga Holdings Bhd is seeking a 15% return on equity (ROE) for its water concessionaires, compared to 12% offered by the Selangor state government.

- The report quoted a source as saying that this has been the reason for the delay of the takeover exercise of the water assets.

- At 12% ROE, the takeover exercise is valued at RM12bil, compared to RM9.65bil in the current offer. This is because the state government would also need to bump up the ROE to 15% for the other water concessionaires.

- At the current offer, the equity of Puncak Niaga Sdn Bhd (wholly-owned unit of Puncak Niaga) is valued at RM1.1bil, while its 70% stake in Syabas is worth RM400mil.

- However, Selangor chief minister Tan Sri Khalid Ibrahim had told the state assembly that it would not budge from the current offer. According to the report, the federal government would also hold the golden share in a new company that will be formed to manage the water assets.

- In any case, the source said that Puncak Niaga could take up the present offer at the table and seek an arbitration process for the remaining amount that the company is seeking.

- A common auditor is also likely to be appointed to value the assets.

- Khalid Ibrahim told the state assembly that negotiations over the value and method of payment for the takeover are expected to be completed by year-end. The takeover process will then take another three to six months to complete.

- Notwithstanding this, we are optimistic of a conclusion to the water impasse soon to ensure sustainable water supply to the Selangor state. We view that an offer will likely be made by year end but talks might be extended to early-next year before any decision is made.

- In the previous offer, 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 owned by Pengurusan Aset Air Bhd, a wholly-owned unit of Ministry of Finance Inc.

- 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.

Source: AmeSecurities