- Fed government to invoke WASIA: Putrajaya said that it will pursue to exercise its rights and powers under the Water Services Industry Act (WASIA) 2006 to consolidate the Selangor water industry. This follows the rejection of water concessionaires (except for Kumpulan Perangsang Selangor Bhd) to the latest offer of RM9.65bil on Monday.

- State government to pay RM2bil less: With this, Selangor Menteri Besar Tan Sri Khalid Ibrahim was quoted as saying that the state government will pay RM2bil less for the takeover exercise. He noted that the state government would only pay RM7.65bil for the water assets and not fork out anything for the equity portion, as the latter is not required under the act. Being the only party that has accepted the state’s offer, Khalid said that K.Abass will get the “higher value for water assets and equity”.

- Merger of operations in three months: Khalid was quoted in Starbiz today that the effective date for the handover of the water assets from the concessionaires to the Selangor state will be announced later. Nevertheless, Khalid said that it is not expected to happen in at least three months.

- SPV to be headed by KDEB president: The water assets will be placed under a special purpose vehicle (SPV) headed by Suhaimi Kamaralzaman, the president of Kumpulan Darul Ehsan Bhd (KDEB) and former CEO of Pengurusan Aset Air Bhd. Recall that under the MoU, the Federal government has the option to hold a 30% stake in the SPV.

- Invoking WASIA will have deep implications: While we were not surprised with move to invoke WASIA as the Fed government had reiterated its intention to do so should the latest offer not go through, we view that the move would have deep implications on the sanctity of contracts involving the government.

- WASIA does not entail a takeover of assets: We also understand that Section 114 of WASIA does not entail a “forced takeover” of water assets, i.e. the transfer of ownership of assets. The section only allows for Suruhanjaya Perkhidmatan Air Negara (SPAN) to “assume control” of the whole of the property, business and affairs of a licensee and to carry its business and affairs for national interest.

- WASIA against the Federal Constitution? In our checks with the water players, we understand that there is a possibility of legal action if the Federal government moves on with the invocation of WASIA. Section 114 states that what amounts to national interest shall be made by the Minister and cannot “be challenged, appealed, reviewed, quashed or questioned in any court”. However, it can be seen as contravening Section 13 of the Federal Constitution which states that: “no law shall provide for the compulsory acquisition or use of property without adequate compensation.”

- Maintain NEUTRAL: The companies have yet to make any announcement of receiving any notifications from the state and Federal government on the takeover of assets. As such, we maintain NEUTRAL on the water sector pending a firm decision by the Federal government on invoking WASIA and the responses by the various water players. We expect the consolidation efforts to be a protracted affair while we expect Langat 2 to move ahead as per the MoU. We maintain our HOLD call on Puncak Niaga with a fair value of RM3.40/share – a 20% discount to our break-up value of RM4.25/share. Our valuation is based on the RM9.65bil offer and takes into account the water receivables, payables and compensation for delay in water tariff hikes. If we remove the equity portion from our valuation model, Puncak Niaga’s break-up value would be reduced to RM1.34/share. 

Source: AmeSecurities