- Mixed response: The water concessionaires have responded to the Selangor state’s (via Kumpulan Darul Ehsan Bhd or KDEB) latest offer to consolidate the water assets for RM9.65bil. As expected, Gamuda Bhd (which owns 40% in SPLASH) rejected the offer, Kumpulan Perangsang Selangor Bhd (KPS) accepted the offers, while Puncak Niaga Holdings Bhd said it was willing to consider the offers if certain conditions are met.

- No surprise as offer similar to previous one: The responses are no surprise as the latest offer is similar to the previous one (made in Nov 2013) except that it includes an option for an international arbitration process. The offer is based on:- (i) 12% ROE per annum for the equity portion; and (ii) water assets to be acquired by Pengurusan Aset Air Bhd (PAAB).

- Net offer below 10% of SPLASH’s NAV: Gamuda said it was constrained from accepting the offer due to the “adverse consequence” on the company. It noted that the net offer of RM250.6mil will result in a huge divestment loss of RM920mil, compared to SPLASH’s net book value of RM2.54bil as at end-Dec 2013. Gamuda willing to accept offer if based on NAV, and maintenance of O&M: Gamuda said it would only accept an offer if the following conditions are met:- (i) Payment of SPLASH’s NAV; and (ii) the retention of Gamuda Water Sdn Bhd and Sungei Harmoni Sdn Bhd as operations and maintenance (O&M) operators of SPLASH at the existing terms. KDEB’s equity return formula is not appropriate: Gamuda further noted that the 12% return of equity (ROE) formula is not appropriate to value concessions. Based on a fixed return, it pointed out that companies which made huge losses will benefit significantly while those that are profitable and have been efficient are punished. It noted that it had accepted the previous offers (prior to Nov 2013) despite forgoing the entire future earnings of the next 16 years. It hinted that a discounted cash flow (DCF) method to be a better option to value concessions.

- Puncak willing to consider, but with conditions: Puncak Niaga said it is willing to consider the offers, following the clarification/confirmation of the following:- (i) a 15% compounded ROE for equity; (ii) receivables due and outstanding from SYABAS to Puncak Niaga Sdn Bhd (PNSB) to be paid to Puncak Niaga; (iii) any residual cash in PNSB and SYABAS to be paid to Puncak to represent the profits attributable to Puncak; (iv) removal of due diligence post-acceptance; and (iv) the acquisition of water assets by PAAB to not be concurrent. These conditions were previously put forth in its response to the Nov 2013 offer.

- KPS accepts offers: On the other hand, KPS said it resolved to the accept the offers, based on the following:- (i) KPS shall have the right to refer any dispute in determining the equity value to an arbitration process; (ii) due diligence to de done on SPLASH and Titian Modal Sdn Bhd (TMSB, which owns water treatment operator K.Abass); and (iii) the acceptance by KPS to be condition on the approval of its shareholders at general meeting to be convened.

KPS said it was willing to accept the offers after considering:- (i) notification received to not renew SPLASH and K.Abass’ raw water extraction licenses beyond 30 June and 31 May 2014, respectively; (ii) possibility of defaults of TMSB’s outstanding bonds worth RM345mil in total; (iii) the possibility of the Fed government invoking WASIA provisions; and (iv) possibility of adjustment in consideration through an international arbitration process.

- International arbitration not confined to equity based formula: Meanwhile, Puncak Niaga said the arbitration clause should be removed as it violates the spirit of “laissez faire”. Gamuda noted that it would only submit to arbitration if it was not confined to the equity based formula.

- Ball in Fed and state govt’s court: We are not surprised with the outcome as there were little changes made to the latest offer; it did not take into account the receivables and compensation for delays in water tariff hike. With the ball now in the Fed and state govt’s court, it remains to be seen what will be their next move. Both governments are expected to sign a heads of agreement for Langat 2 and the water restructuring exercise soon.

- Maintain NEUTRAL. As there are no changes, we maintain NEUTRAL on the sector, and HOLD for Puncak Niaga as we deemed it to be fully valued at RM3.40/share. 

Source: AmeSecurities