- PAAB and state sign four agreements: The long-drawn water restructuring deal in Selangor has finally reached its conclusion following the signing of four agreements yesterday between Pengurusan Aset Air Bhd (PAAB) and Pengurusan Air Selangor Sdn Bhd (PASSB). The four agreements signed are:- (i) facility agreement; (ii) lease agreement; (iii) rights of use agreement; and (iv) settlement agreement (see inside page for details).

- Master agreement takes effect immediately…: The agreements are conditions precedent (CPs) to effect the master agreement that was signed almost a year ago (on 12 Sept 2014). With the fulfilment of the CPs, the master agreement is now completed. PASSB is expected to take over Puncak Niaga Sdn Bhd (PNSB) and Syabas within two weeks and Konsortium Abass within the next four months.

- … as the deal is sealed: With the completion of the master agreement, the water restructuring exercise has finally reached a major milestone following seven years of impasse. We are not surprised with the latest development as both the Federal and state governments have reiterated their commitments to finalise the deal within 60 days from the signing of the supplementary agreement on 10 July (For salient details of the supplementary agreement, see next page). The signing of the four agreements effectively completes the master agreement and the release of RM2bil from PAAB to PASSB for the acquisitions of Syabas, PNSB, Konsortium Abass, and SPLASH.

- Finality for Puncak Niaga: The completion of the deal signals the long awaited finality of Puncak Niaga Holdings Bhd’s sale of water assets to PASSB for RM1.55bil. Recall that the sales and purchase agreement to dispose 100% and 70% stakes in PNSB and Syabas, was signed last Nov. We understand that Puncak Niaga is expected to receive the proceeds when the takeover by PASSB is completed. We understand from management that it intends to pay out RM534mil (or RM1/share on a fully-diluted basis) as cash dividends soon following the completion of the deal. Puncak Niaga’s future prospects hinge on the utilisation of RM1bil of the proceeds for either oil & gas or plantation ventures. Our HOLD call and fair value of RM2.80/share remain as prospects remain cloudy beyond dividend payout.

- Negotiations for SPLASH to kick into a higher gear: With the completion of the water deal, we expect talks between the state and SPLASH will shift to a higher gear. According to media reports, Selangor Mentri Besar Azmin Ali said that the state has begun negotiations with SPLASH and hopes to conclude a deal by July next year (within a year from the signing of the supplementary agreement). We are hopeful that negotiations can be completed in a shorter timeframe compared to that for Puncak. We have a BUY call on Gamuda (fair value: RM5.80/share), which holds a 40% stake in SPLASH. We estimate the water assets account for RM994bil (or RM0.40/share) or 6% of Gamuda’s NAV.

- Langat 2 on track: We also expect the Langat 2 project to remain track to completion to 2019 given the commitments by both Federal and state governments. Last month, raw water was transferred for the first time from Sg. Semantan in Pahang to Sg. Langat in Selangor as part of a mitigation move to maintain the water level at the Sg. Langat dam. The completion of Langat 2 is crucial to ensure water supply sustainability in the state.

- Maintain NEUTRAL: While the latest development has been expected, we are nevertheless still positive on the news. We now await a conclusion with SPLASH for the ultimate closure to the water restructuring exercise in the state. We maintain our NEUTRAL call on the sector.

Source: AmeSecurities Research - 9 Sep 2015