- Kumpulan Darul Ehsan Bhd (KDEB), the investment arm of the Selangor state government, has notified the water concessionaires that it will ceased discussions on the proposed takeover of water assets “for the foreseeable future”. KDEB said this in two separate letters to Puncak Niaga Holdings Bhd and Kumpulan Perangsang Selangor Bhd (KPS) yesterday.

- The move is in light of the state government’s agreement for the Federal government to exercise its rights and powers under Section 114 of the Water Services Industry Act 2006 (WASIA), which allows it to assume control “of the whole of the property, business and affairs of a licensee”. KPS said that it would seek legal advice and evaluate its implications accordingly.

- KDEB’s letters to the water players followed news reports yesterday of the Selangor state agreeing for the Federal government to invoke Section 114 of WASIA if the deal was not concluded by Dec 31, 2013.

- The decision was made following a meeting between Selangor chief minister Tan Sri Khalid Ibrahim and Energy, Green Technology and Water Minister Seri Dr Maximus Ongkili on Tuesday.

- The takeover is subject to certain conditions, including the appointment of two administrators by the National Water Services Commission (SPAN) to handle the restructuring exercise. The two appointed are KDEB president Suhaimi Kamaralzaman and Menteri Besar Inc CEO Faekah Husin. They will also oversee the implementation of the Langat 2 project.

- Ongkili was quoted in New Straits Times today as saying that a special cabinet committee, headed by Deputy Prime Minister Tan Sri Muhyiddin, would finalise the legal structure and mechanism, technical and financial matters before invoking Section 114.

- In our view, the move to invoke Section 114 could deal a big blow to the water players as they were holding out for better terms compared to the fifth and latest offer made in November. The main contentions of the offer include the absence of payment of surplus of assets over liabilities, settlement of receivables, and the 12% ROE evaluation of the equity portion. With the invocation, it is uncertain if the terms of the offer still stand.

- Apart from that, it is uncertain if the invocation of Section 114 of WASIA would supersede the requirement of obtaining shareholders’ approval for the takeover of water assets. In addition, there is the question on whether the takeover could be challenged or reviewed in court.

- While the invocation of Section 114 of WASIA may expedite the restructuring exercise, we opine that the water players are unlikely to receive an offer that meets expectations.

- We maintain NEUTRAL on the water sector as we await further clarity on how the governments would proceed with the restructuring exercise. We have a HOLD for Puncak Niaga with a fair value of RM3.40/share, as we deem it to be fully valued at this juncture. We also have an implied value of RM1.42/share for KPS (non-rated). 

Source: AmeSecurities