- May seek a higher price: Yesterday, Puncak Niaga Holdings Bhd (PNHB) has received a request from the state’s arm, Pengurusan Air Selangor Sdn Bhd (PASSB) for a fifth extension for the fulfilment of conditions precedent in the sales and purchase agreement. PNHB said that its board of director will deliberate on the decision and it may seek a higher price for the proposed disposals (see Puncak Niaga report released today). We opine that this may cause another setback for the restructuring exercise as it may be inconsistent with the terms in the master agreement.

- “The ball is in [the state government’s] court”: According to media reports, the Federal government has now left the direction of the water restructuring exercise to the state. Minister of Energy, Green Technology and Water (KeTTHA) Datuk Seri Dr Maximus Ongkili said the Federal government had fulfilled its part and had “exhausted all avenues,” and it is up to Selangor to fulfil its part of the deal. To this end, Maximus said he had written a letter to the Selangor Mentri Besar Mohamed Azmin Ali on 30 April. In reply, Azmin had asked the Federal to fix a meeting soon.

- Completion hinges on the transfer of Bukit Nenas and Semenyih assets: The completion of the water deal still hinges on the transfer of the Bukit Nenas and Semenyih water assets to Pengurusan Aset Air Bhd (PAAB). Recall that the delay was caused by a dispute on the ownership of the two assets. According to recent reports, the dispute was caused by KeTTHA officials who erroneously listed the two assets as state-owned as opposed to federal-owned. This was the reason why the state was adamant that the two plants belong to Selangor when in actual fact both plants and land are federal-owned.

- Four other assets identified: In any case, state and federal officials in a recent meeting have identified four other assets – with adequate value to replace the Semenyih and Bukit Nenas assets – to facilitate the transfer. But this could not be finalised yet. Recall that assets amounting to RM2bil are required to be transferred to the Federal government before funds can be allocated to PASSB for the acquisition of the concessionaires’ equity.

- Invocation of WASIA is still a last resort: Maximus said the Federal government may be forced to invoke the Water Services Industry Act (WASIA) to compel Selangor to proceed with the water deal, but this will still be a last resort.

- Langat 2 project still underway: While the Langat 2 water treatment plant (WTP) project is still underway, Maximus said Selangor has continued to delay the issuance of permits for the project. As at end-Feb, the RM4bil Langat 2 project was only 1.2% completed (vs. the targeted 3.4% then). The plant will supply 1,130mil litres of water per day (MLD) when completed in 2017.

- More calls to resolve the dispute: It is imperative that the two governments resolve the water stalemate as soon as possible in order to ensure sustainable water supply in the Selangor, Kuala Lumpur, and Putrajaya. According to water experts, the treated water reserve margin is now hovering at ~1% vs. the recommended 50% level. This is further exacerbated by unscheduled WTP shutdowns caused by river pollution in Selangor (see Exhibit 3 & 4).

- Risk of pollution and project delays: Last year, Selangor WTPs were shut down 42 times, disrupting supply for 2,838 hours. Furthermore, Sg. Sembah in Rawang was identified as an area with the most potential for pollution; it is subcatchment area for Sg. Selangor, which supplies over 60% of raw water in Selangor. In addition, PNSB chairman Tan Sri Rozali recently said inadequate water supply has put 1,038 new development projects (with a demand of 850.8MLD) on hold.

- Maintain NEUTRAL: Given the need to ensure sustainable water supply, we opine that both parties need to reach an amicable solution soon. While there is no end in sight yet, we remain hopeful of a resolution. Maintain NEUTRAL. Our HOLD call on Puncak Niaga (fair value: RM2.86/share) also remains as its prospects hinge on the completion of the water deal.

Source: AmeSecurities Research - 12 May 2015