- The Edge Malaysia reported over the weekend that legal wrangling may emerge between the Federal government and Selangor state government over the ownership of water assets in the state.

- The report, which quoted an unnamed source, noted that the feud centres on the ownership of a number of assets such as the Semenyih and Bukit Nanas dams, and the pipe network in Selangor. Note that Konsortium ABASS Sdn Bhd and Puncak Niaga (M) Sdn Bhd operate the Sg. Semenyih Water Suppy Scheme and Bukit Nanas water treatment plant, respectively. The distribution pipes in Selangor are owned and maintained by SYABAS.

- According to the report, the Selangor state claims that it should control the water assets instead of the Federal government. Due to the dispute, the Federal government is said to have requested for a one-month extension from the first week of Feb.

- In our recent meeting, Puncak Niaga Holdings Bhd noted that it is hopeful of wrapping up the water deal by Chinese New Year. Based on the report, we believe that there could be some delay in the completion of the water assets sale for Puncak, but it is unlikely to be dragged for too long or being altogether derailed.

- This is because under the Water Services Industry Act 2006 (WASIA), Pengurusan Aset Air Bhd (PAAB) is mandated to take over all the existing water assets from the state. After the transfer, state water operators will then lease the assets back from PAAB for operations and maintenance (O&M) of assets.

- The rationale for the water restructuring exercise is for the O&M licence holders to operate on an asset-light basis while capex will be entirely funded by the Federal government (via PAAB). Thus in our view, it is unlikely that the state government would intend to maintain ownership of assets given that the business model (under WASIA) would free up its balance sheet while ensuring cash flow contributions.

- Furthermore, the restructuring exercises that were concluded in other states previously saw PAAB taking over the entire water assets while the O&M licences are held by the respective state governments (see Exhibit 1).

- Our channel checks suggest that the delay for the completion of Puncak’s deal is due to time needed to fulfil conditions precedent in the sales & purchase agreement. We understand that the conditions are related to certain terms agreed between the Federal and state governments under the master agreement signed last year. Note that Pengurusan Air Selangor Sdn Bhd had last month requested for an extension until next Monday (9 Feb) to meet these conditions.

- If all goes well, the deal is expected to be completed before Chinese New Year with the special dividend of RM534mil (or RM1/share) to be paid out by May.

- We also understand that negotiations between the state government and SPLASH would only kick into a higher gear once the water deal with Puncak is completed. Recall that the state government had previously made an offer of RM250mil for SPLASH. Gamuda, which owns a 40% stake in SPLASH, had deemed the offer to be low against SPLASH’s net book value of RM2.8bil as at end-Nov 2014.

- All in, we are unperturbed with the latest news and believe that the water deal will likely be completed within the 1H of 2015 due to the urgency to consolidate the water supply industry in the state. We maintain NEUTRAL on the water sector and HOLD for Puncak Niaga (Fair Value: RM3.40/share) as we await concrete details of the latter’s plans beyond the dividend windfall. We have a BUY on Gamuda with a fair value of RM5.80/share.

Source: AmeSecurities