- Maintain BUY on Gamuda with an unchanged fair value of RM5.25/share, tagged at a 10% discount to its SOP value. The Star reported that the Federal government has agreed to invoke Section 114 of the Water Services Industry Act 2006 (WaSia) to pave the way for it to control all four water concessions and a water licensee in Selangor.

- Energy, Green Technology and Water Minsitry Datuk Seri Dr. Maximus Ongkili was quoted in the report as saying that the decision was arrived after a weekly Cabinet meeting last Friday.

- The report further added that the invocation of Section 114 was conditional on both the Federal and Selangor governments signing heads of agreement in respect of the water industry restructuring, financial facilitation and completion of the Langat 2 project. These terms were earlier set out in a MoU that was signed between both parties on 26 February 2014.

- While nothing is firmed up as yet, Ongkili has been mandated by the Cabinet to decide on the date of commencement for the invocation.

- This latest development could see the Selangor water industry moving into unchartered territory, as it is the first time that Section 114 is be invoked to resolve this longstanding stalemate.

- We had previously highlighted that Section 114 of WASIA does not entail a ‘forced takeover’ of 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 to carry its business and affairs for national interest.

- Gamuda’s water business is currently represented by its 40% stake in SPLASH and Gamuda Water (80% stake). For 1HFY14, the water & expressways division contributed a pre-tax profit of RM137mil or c.35% of group profit.

- We maintain our current estimates of RM2.3bil (Gamuda’s 40% stake: ~RM914mil) for SPLASH, which implies a ~10% discount to its reported net book value of RM2.5bil as at 31 December 2013. Notably, previous offers for the water assets in other states were concluded at one-time book value.

- Pending more clarity – especially with regard to the water players’ responses – we maintain our forecast for now. Including Gamuda Water, we value Gamuda’s water assets at RM1.2bil or c.RM0.50/share.

Source: AmeSecurities