• Air Selangor made an offer to acquire SPLASH for RM2.6bn, ending a decade-old impasse. Gamuda would receive upfront cash of RM760m with the rest paid over 9 years at 5.25% p.a.
• We are positive on this offer as it is: i) 10x higher than the last offer made and ii) allows Gamuda to exit SPLASH which faces default risk of receivables from SYABAS worth over RM4.7bn.
• We also see good long-term prospects for Gamuda Water (the O&M contractor) which could mitigate the paper loss arising from this deal – a key element in the negotiation, in our view.
• BUY Gamuda with RM4.35 TP based on SOP. We believe the share price correction makes a good buying opportunity as we see the stock’s fundamentals remain largely intact.

Ending a decade-old impasse

SPLASH shareholders received an offer by Air Selangor to acquire 100% equity in the company for RM2.55bn. Of that amount, RM1.9bn would be paid upfront in cash while the remaining RM650m are paid out over a 9-year instalment with interest rate of 5.25% p.a.

Positive on offer

While the offer price is a 28% discount to SPLASH’s RM3.54bn book value, we are positive on the offer price due to: i) the amount offered is 10x higher than the last offer made – RM250.6m, and ii) we note that SPLASH could be faced with a default risk of receivables from SYABAS worth c.RM4.7bn, according to Selangor MB. The concession held by SPLASH is up to 2030, leaving another 12 years till it ends.

Revised GWSB’s O&M contract may mitigate paper loss

We understand from management that terms of the O&M contract between Gamuda Water S/B (GWSB) and the state government is still being ironed out at the time of writing. We believe any revision of the terms would not only mitigate the RM400m paper loss from the 28% discount on SPLASH but could also release RM600m of payment owed to GWSB.

Sound fundamentals; good visibility

The market responded negatively to the deal as Gamuda’s share price fell 4.1% on Monday (as per the value discounted). Still, we believe fundamentals remain intact; current Construction orderbook worth RM6.5bn and unbilled property sales worth RM2.2bn at end 9MFY18 provides earnings visibility up to FY21/22F.

BUY with TP of RM RM4.35

BUY Gamuda with SOP-derived TP of RM4.35. We believe the SPLASH deal removes overhang on the stock while unlocking the concession value upfront. Accumulate on weakness.

Source: BIMB Securities Research - 7 Aug 2018