- The Edge Financial Daily reported today that the Economic Council (EC), part of the Prime Minister’s Department, is stepping in to help resolve the water impasse in Selangor.

- According to a source quoted in the report, the EC is currently studying a proposal that could be favourable to all parties involved. It noted that a decision could be made within the next few weeks.

- The source noted that the federal government is showing “strong political will” to end the water impasse.

- This news follow reports that the Federal and state governments are disagreeable on certain terms in the draft of the Heads of Agreement (HoA). One of the key issues that both governments cannot agree on is the operation & maintenance (O&M) concession for the water treatment plants (WTPs).

- According to previous reports, there has been “strong lobbying” for the O&M concessions to be granted to the existing concessionaires, namely Puncak Niaga Sdn Bhd and Splash. However, the state government is also eyeing the O&M concessions to be held via its investment arm, Kumpulan Darul Ehsan Sdn Bhd (KDEB).

- Apart from that, we also understand that a form of tariff hike is also one of the issues being discussed.

- The latest news affirms our view that a commercial approach based on a consensus valuation is still the most viable option in order to achieve a long-term solution to resolve the water impasse.

- There is a possibility that with the EC in the fray, a resolution could be reached without resorting to the invocation of Section 114 of the Water Services Industry Act 2006 (WASIA). After all, the invocation is an interim solution as it only allows for the taking control of operations, and not the transfer of asset ownership.

- 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. Maintain NEUTRAL.

Source: AmeSecurities