- Selangor Menteri Besar Tan Sri Khalid Ibrahim has ordered the termination of raw water licences granted to water concessionaires in the state, including Puncak Niaga Holdings Bhd’s, The Edge Malaysia reported on Monday.

- This is in line with the water restructuring exercise in Selangor. Khalid said the state has instructed the Selangor Water Management Authority to “coordinate the issuance of raw water to be given to Kumpulan Darul Ehsan Bhd (KDEB)”.

- While Khalid had singled out Puncak Niaga, it is uncertain if the state is also terminating the raw water licences for other players, namely Konsortium Abass Sdn Bhd and SPLASH.

- In effect, we understand that the move will entail the cutting of raw water supply to the water treatment plants (WTPs). The supply of raw water is under the purview of the state government. While the water treatment players still retain their licences to treat water, they would have to source the raw water from other supply (which could be close to impossible).

- In line with this, Khalid has ordered for the commencement of project HORAS (Hybrid Off River Augmentation System) in Sg. Selangor, which will be able to supply 600-700 million litres of water per day (MLD). The HORAS system involves the accumulation of storm water from Sg. Selangor in a former mining area of Bestari Jaya. This will reduce the state’s dependence on Langat 2 for sustainable water supply.

- The latest move signals that the restructuring exercise could be reaching its apex, although we think that the water players are unlikely to receive an offer that meets expectations.

- In addition, we are uncertain if the move violates any concession agreements and if the WTPs would be forced to cease operations immediately. Nevertheless, we expect developments to be expedited (with an offer in offing) given the urgency of the issue.

- To recap, KDEB said last Thursday that it would cease discussions on the proposed takeover of water assets “for the foreseeable future”. This is to allow the Federal government to invoke Section 114 of the Water Services Industry Act 2006 (WASIA) for it to assume control of “of the whole of the property, business and affairs of a licensee”.

- Puncak Niaga operates 29 WTPs in Selangor (capacity of 1,930 MLD), while K.Abass operates the Sg, Semenyih WTP (600 MLD), and SPLASH operates SSP1 and SSP3 (2,000 MLD).

- We maintain NEUTRAL on the water sector as we await a new offer from the Federal government. We have a HOLD for Puncak Niaga with a fair value of RM3.40/share, which is based on the last offer made in Nov. We also have an implied value of RM1.42/share for KPS (non-rated). 

Source: AmeSecurities