- Maintain BUY on Gamuda with an unchanged fair value of RM5.40/share – at a 10% discount to its Sum-Of-Parts (SOP) value. Gamuda announced that SPLASH was unable to accept the offer by Kumpulan Darul Ehsan Bhd (KDEB) to buyout SPLASH for RM251mil. In a reply to KDEB, SPLASH highlighted its reasons below: (1) The net offer of RM251mil is only a tad below 10% of SPLASH’ NAV of RM2.5bil as at 31 December 2013. This in turn, would have resulted in a huge divestment lost of ~RM920mil for SPLASH. (2) The latest offer dated 26 February 2014 was much lower than the previous two made by the Selangor government on July 2009 and February 2013 respectively, which SPLASH had then accepted. (3) SPLASH felt that the fixed return of 12% on equity that KDEB employed is inappropriate, as it causes an upside bias on entities with a shorter lifespan. The reverse is true where entities which are inefficient or highly leveraged would greatly benefit from the fixed return. It argued that it had even agreed (in the previous offers) to forego future earnings from its remaining 16 years. (4) However, SPLASH stated that it is willing to accept the offer if key terms, which were included in the previous two offers, are re-instated. They would include the payment of:- (i) SPLASH’ NAV as per the July 2009 and February 2013 offers; and (ii) retention of Gamuda Water & Sg.Harmoni Sdn Bhd as operations & maintenance operators of SPLASH.

- We are not surprised by SPLASH’ latest move. Apart from being silent on water-related debts, we felt that the current offer did not adequately address any surplus on SPLASH’ NAV or its water receivables. Nor was there any recognition of the status of SPLASH’s O&M contractors, unlike the previous offers.

- We maintain our valuation and forecast on Gamuda for now. We value its water assets collectively at ~RM1.3bil or RM0.53/share. While SPLASH is ready to resolve any differences via arbitration – subject to the valuation method being decided by an arbitration panel – we are unsure how long the water impasse would continue.

- On the flipside, we see the expected endorsement of the Klang Valley MRT2 line as a positive re-rating catalyst for Gamuda, where the group is a frontrunner together with partner, MMC Corp.

Source: AmeSecurities