- One step closer: The Selangor state’s water restructuring exercise is one step closer to finalisation following reports last Friday that Puncak Niaga Sdn Bhd (PNSB) and Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) have agreed to accept the Selangor government’s takeover offer.

- PNSB and SYABAS accept offer: The acceptances by the two companies were announced in a press statement by Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili and Selangor Menteri Besar Tan Sri Khalid Ibrahim. However, Puncak Niaga Holdings Bhd has not made an announcement to Bursa Malaysia on the decision.

- Same offer: According to the statement, the offer is exactly the same as the one made in Feb and last Nov. The breakdown is as follow (also see table 1):-

(i) RM2.5bil for PNSB (equity portion based on 12% ROE: RM1.1bil; water assets to be acquired: RM1.4bil); and

(ii) RM3.1bil for Syabas (equity portion based on 12% ROE: RM437mil; water assets to be acquired: RM2.7bil).

- Acceptance of offer in line with the MoU: The offer is in line with the amount agreed upon the memorandum of understanding (MoU) signed between the two governments in Feb.

- Invocation of Section 114 of WASIA postponed: Following the acceptance of the offer by PNSB and Syabas (as well as K.Abass), the governments have agreed to postpone the invocation of Section 114 of the Water Services Industry Act 2006 (WASIA), which entails a takeover of water operations.

- Acceptances at 1.3x book value of PNSB and against Syabas’ negative book value: Based on Puncak Niaga’s FY13 audited accounts, we estimate that PNSB is being offered at 1.3x its book value of RM2bil, while Syabas is being offered against a negative book value of RM2.04bil (-RM1.4bil based on Puncak Niaga’s 70% stake in Syabas). Recall that water assets in other states were acquired at ~1x of the respective book values (see table 2).

- Offers still subject to shareholders’ approval in EGMs: The offers will still subject to shareholders’ approval in EGMs to be held soon.

- Governments to continue talks on sale and leaseback agreements: According to the statement, both governments will resume talks on the sale and leaseback agreements. At this juncture, it is unclear if PNSB would retain its operation and maintenance (O&M) licence once the assets are transferred or it would be given to a special purpose vehicle under the state government. There is also no clarity on the timing of the signing of the Heads of Agreement (HoA) between the two governments.

- SPLASH left but disparity in valuation: With the latest acceptances, SPLASH is last player left that is needed to end the water saga. However, there is a disparity of valuation disfavouring SPLASH based on the current offer. Recall that Gamuda has rejected the latest offer as the equity payment for SPLASH was only RM250mil, which is 10% of its net book value of RM2.54bil as at end-Dec 2013.

- Fair valuation for SPLASH still key: The acceptance follows the involvement of the Economic Council last week to help resolve the six-year water impasse in Selangor. While the latest acceptances are a move closer towards a resolution of the water impasse, the ultimate closure still hinges on an acceptance by SPLASH. As such, we opine that a fair valuation for SPLASH would remain crucial to push the restructuring exercise to its final resolution.

- Maintain NEUTRAL: Our fair value for Gamuda (BUY, RM5.25/share) reflects a 10% discount to SPLASH’s net book value of ~RM2.5bil as at end-Dec 2013. Meanwhile, our fair value of RM3.40/share for Puncak Niaga (HOLD) remains unchanged as the valuation is based on the current offer. Maintain NEUTRAL. 

Source: AmeSecurities