- First Langat 2 package awarded: The first Langat 2 package has been awarded to Salcon MMCB AZSB JV Sdn Bhd. The award is for the development of Langat 2 water treatment plant (WTP) and water reticulation system phase 1, and construction of 1,130 million litres per day (MLD) Langat 2 WTP. The award is worth RM993.8mil (see table 5). The job will be carried out for 36 months and is scheduled for completion by April 2017. The JV company – jointly controlled by Salcon Bhd (36%), MMC Corp Bhd (34%), and Ahmad Zaki Sdn Bhd (30%) – received the letter of acceptance yesterday. This is the first package to be awarded out of the Langat 2 project, reportedly worth ~RM4.1bil. We opined that the water pipes and reservoir package could be awarded next, with an estimated value of ~RM1bil, with at least four players have been shortlisted for the water pipe package. We see JAKS Resources (non-rated) as a potential beneficiary of the water pipes package as it is the only player capable of delivering large diameter water pipes on a supply-and-lay basis. Apart from JAKS Resources, Boon and Cheah Steel Pipes Sdh Bhd was the other company that supplied pipes for the Langat 1 project. We expect more packages will be awarded soon for Langat 2. We understand that the remaining packages would be for the reservoir as well as land acquisition costs.

- Mitigation works to kick off by next year: While awaiting Langat 2’s completion in 2017, the National Water Services Commission (SPAN) will carry out three mitigation plans worth RM121mil. These are:-

(i) Transfer of raw water from Negeri Sembilan to Selangor through an underground pipeline. The RM35mil project involves the supply of water from the Triang dam to the Ngoi-Ngoi treatment plant. The Triang water supply scheme will produce 45 MLD while another WTP will be built in Ngoi-Ngoi with the water sold to the Federal government.

(ii) Upgrading works of the existing Langat 2 plant. According to SPAN chairman Datuk Ismail Kassim, the existing Langat 2 plant is currently processing 500 MLD of water, when it was only designed to treat 386 MLD. As such, SPAN will invest RM37mil to upgrade the WTP.

(iii) Upgrading water pumps. SPAN will also allocate RM40mil to upgrade several Syabas’ water pumps. This is to reduce the risk of pumps breaking down.

- Heads of Agreement to be inked soon: Federal government is expected to sign the Heads of Agreement (HoA) with Selangor soon before proceeding to invoke Section 114 of the Water Services Industry Act 2006 (WASIA). The agreement has been drafted by the Attorney-General and has been sent to the Selangor government. The HoA covers details of the Langat 2 development as well as the water restructuring exercise.

- Maintain NEUTRAL: Notwithstanding the cabinet’s decision to move ahead with the invocation of Section 114, we opined that a commercial approach based on a consensus valuation is still most viable to achieve a long-term solution to resolve the water impasse. After all, the implementation of Section 114 only allows for the taking control of operations, and not the transfer of asset ownership. The water players have also indicated plans to resort to legal recourse if Section 114 is invoked. Note that the previous water assets in the other states were concluded at 1x book value. We have a BUY for Gamuda (Fair value: RM5.25/share), which reflects a 10% discount to Splash’s net book value of ~RM2.5bil as at end-Dec 2013. We maintain HOLD on Puncak Niaga, with a fair value of RM3.40/share, which is based on the previous offer.

Source: AmeSecurities