- Revisiting Johor takeover: With SPLASH seemingly being the last to agree to the takeover of water assets, we understand that the privatisation model conducted in Johor could be a form of guidance.

- Previous offers concluded at 1x book value: To recap, most of the water assets in the other states were acquired at one time book value. Since 2008, six states have transferred their assets to Pengurusan Air Aset Bhd (PAAB), amounting to RM9.3bil (see table 2). These include the successful transfer of assets from the opposition-led Penang, and private entity, SAJ Holdings Sdn Bhd in Johor.

- Surpluses for the takeovers in Melaka and Johor: In fact, there were instances of payment of surplus of assets over liabilities in the states of Melaka and Johor, as shown below:-

- (i) Surplus of RM119mil in Melaka – The state’s water assets were valued at RM899mil, which is equivalent to one time book value of the total assets. In exchange, PAAB had also relieved Melaka of its Federal government water asset loans amounting to RM770milm. This resulted in a surplus payment of RM119mil to the state.

- (ii) Surplus of RM850mil in Johor – In 2009, PAAB acquired water assets in Johor worth RM4.03bil, from the Johor state government, Syarikat Air Johor Sdn Bhd, and private concessionaire SAJ Holdings Sdn Bhd. The deal was concluded on a willing-buyer-willing seller basis and based on a one time book value of assets. There was a surplus payment of RM850mil, as the liabilities amounted to RM3.18bil.

- Open to an adjusted price offer: As such, we view that a fair valuation at close to one time book value may help push the Selangor water impasse to a resolution. We are not surprised if the governments are looking at the takeover offers that were concluded in other states. Notably, the takeover in Johor involved a private company, i.e. SAJ Holdings.

- PNSB and Syabas accepted offer? Last month, the Federal and state governments announced that Puncak Niaga Sdn Bhd and Syabas had accepted a RM5.6bil offer for their assets. This is based on the same terms and price that have been put forth since Nov last year. However, Puncak Niaga later told the exchange that they are still in talks and have yet to sign any definitive agreements.

- PNSB valued at 1.2x book value and negative book value for Syabas: Nevertheless, we estimate that PNSB is being offered at 1.2x its book value of RM2bil (based on Puncak Niaga’s FY13 audited accounts), while Syabas is being offered against a negative book value of RM2.04bil (-RM1.4bil based on Puncak Niaga’s 70% stake in Syabas).

- SPLASH left but disparity in valuation: If so, SPLASH is the 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 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: With the Federal government putting the invocation of Section 114 of the Water Services Industry Act 2006 (WASIA) on hold, we believed that a commercial solution is still needed to resolve the saga.

- The ultimate closure still hinges on an acceptance by SPLASH. As such, we opine that a fair valuation for SPLASH is still key to push the water impasse to a final resolution. The continuation of the operating and maintenance licences is also a key point in negotiations.

- 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