- Over the weekend, The Edge Malaysia quoted a spokesperson for Selangor chief minister Tan Sri Khalid Ibrahim as saying that the termination of raw water license for concessionaires will take effect on Feb 15.

- According to the spokesperson, the companies would have received the letters last Monday. Nevertheless, our checks with the water players reveal that they have yet to receive any formal letters.

- In our view, the termination of raw water licenses will be detrimental as it would impact the supply of treated water to Selangor, Putrajaya, and Kuala Lumpur. According to The Edge, the clean water produced today is more than 6x of that produced by project HORAS (Hybrid Off-River Augmentation System).

- In our talks with players, we understand that the invocation of Section 114 of the Water Services Industry Act 2006 (WASIA) does not entail a forced takeover of the water assets, but only the control of the day-to-day business. However, they are still unclear on the impact of this as it would be a precedent move by the Federal government.

- Nevertheless, they seem optimistic of a new offer to come from the Federal government.

- Tan Sri Wan Azmi Wan Hamzah, who holds a 30% stake in SPLASH, said the concessionaires would not be pressured to accept a “raw deal”. He noted that SPLASH has been able to meet its obligations under the concession agreement.

- Last week, Khalid ordered the termination of raw water licences granted to water concessionaires in the state, to be given to Kumpulan Darul Ehsan Bhd (KDEB). This is to pave the way for the Federal government to invoke Section 114 of WASIA.

- However, any invocation of the section would require Cabinet approval and is seen as going against free market enterprise.

- We think an offer by the Federal government should happen in the 1H, as the restructuring exercise is key to ensure sustainable water supply to the Klang Valley. As at Nov, the reserve margin was only 1.6%.

- 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