- RM14.9bil to be injected into new SPV: Following the master agreement that was signed last Friday, Selangor Mentri Besar Tan Sri Khalid Ibrahim said that RM14.9bil worth of assets will be injected into new entity Pengurusan Air Selangor Sdn Bhd (PASSB). He said this in a press statement on Monday. PASSB will be tasked to manage the water concessions once the takeover of the water assets and liabilities is completed.

- Provision of RM2bil by the Federal government for the takeover: Khalid said that the Federal government will provide RM2bil for the takeover of the four water concessionaires – Puncak Niaga Sdn Bhd (PNSB), Syabas, SPLASH, and Konsortium Abass Sdn Bhd (K.Abass).

- Master agreement consistent with state’s offers for concessionaires: Khalid also reiterated that the master agreement is consistent with the state’s offer totalling RM9.65bil for the four water concessionaires. As SPLASH is the only one who did not accept the state’s offer, the amount is now RM7.8bil (see Table 1 for the breakdown provided in the press statement). However, we note that there is a difference in the figures stated for Syabas compared to the ones released previously.

- PAAB to take over liabilities worth RM6.1bil: Khalid noted in the statement that the assets and liabilities of the three concessionaires will be transferred to Pengurusan Aset Air Bhd (PAAB) on a leasehold basis for 45 years. The transfer covers all liabilities valued at RM6.1bil (which includes water debts and bonds) and water assets owned by PNSB, Syabas and K.Abass.

- Licences to be issued to PASSB: As such, the facilities and services licences will be issued by Suruhanjaya Perkhidmatan Air Negara (SPAN) to PASSB. PASSB will also manage the Langat 2 water treatment plant (WTP) when it is completed.

- Master agreement to be made public: The statement noted that the master agreement will be made public, subject to the Selangor State Enactment on Freedom of Information with the Federal government’s cooperation.

- Future tariff hikes to be reasonable: Khalid noted that with the new structure, any future hike in water tariffs will be done at a “reasonable rate” to be vetted by SPAN and with the agreement of the state government. He noted that between 2009 and 2015, an 85% hike in water tariffs (as stated in the concession agreements) was prevented.

- Shares of PASSB to be offered to public following good profit record: Khalid also noted that a portion of PASSB shares will be offered to the public when the restructuring exercise is completed and when PASSB has a good profit record.

- State to focus on reducing NRW while awaiting Langat 2 completion: While awaiting Langat 2’s completion in 2017, the state government will focus on reducing non-revenue water (NRW) – currently at 35% in Selangor. This includes ongoing efforts to increase Selangor’s raw water suppler under its HORAS 600 and HORAS 3000 programmes.

- Takeover of SPLASH to be concluded separately: As for SPLASH, Khalid said its takeover will be concluded separately and will not get in the way of the state’s restructuring exercise through PASSB. We opine that a fair valuation for SPLASH is still needed for a complete closure of the water saga.

- Water pipes and reservoir packages up for grabs: With the Langat 2 project poised for completion by 2017, we understand that a total of 15 packages (water pipes and reservoir) worth ~RM1bil will be awarded soon. We believe that JAKS Resources Bhd (non-rated) is a strong contender as it is the only player capable of delivering large diameter pipes on a supply-and-lay basis. We opine that the tender for the smaller diameter pipe packages could be competitive given the proliferation of suppliers in the market.

- Maintain NEUTRAL: The signing of the master agreement last Friday is a bold step towards a concrete conclusion of the water saga amid the political uncertainty in Selangor. We believe that the share sale agreements will be announced in the coming 1-2 months. Note that Puncak Niaga Holdings Bhd is expected to sign a definitive agreement for the water assets sale within these two months. As for SPLASH, we remain hopeful that a fair offer will be made for a complete closure to the water saga. No changes to our call and fair value for Puncak Niaga (HOLD; FV: RM3.40/share). Maintain NEUTRAL.

Source: AmeSecurities