• Gamuda Water (GW), received a new O&M contract from Air Selangor for SSP3; this is subject to the SPLASH acquisition by Air Selangor, announced earlier this month, completed.

• The new terms end the concession 2 years earlier and reduce tariffs by 2sen/m3 while SPLASH would pay its RM700m arrears to GW at 10% discount (i.e. RM630m).

• The earnings impact is minimal; we view this and the earlier deal on SPLASH positively, allowing Gamuda to monetise its assets upfront while remaining in the water utility sector.

• Maintain BUY with revised SOP-derived TP of RM4.30. The deal cements GW as SSP3’s sole O&M operator which could position GW for any upcoming projects in the water industry.

Finalising O&M SSP3 contract

Air Selangor offered Gamuda Water (80%-owned subsidiary) a new operating and maintenance (O&M) contract for SSP3. The new contract is subject to the completion of Air Selangor’s acquisition of SPLASH, announced earlier this month.

Minimal impact on new contract terms

Salient terms being reviewed were: i) a 2sen/m3 or 4% reduction in service tariffs and ii) concession period reduced by 2 years to end in 2029, instead of 2031. The changes would have minimal impact on our forecast FY18F-20F.

Deal ‘sweetener’

To ‘sweeten’ the new contract, Air Selangor has offered to pay up its c.RM700m arrears to GW at a 10% discount (ie. RM630m). The first 10% would be paid upfront while the rest, over 9 annual instalments at 5.25% p.a.

Maintain BUY with revised TP of RM4.30

The impact from the new contract terms lower our SOP-derived TP to RM4.30 (from RM4.35). Maintain BUY on Gamuda. We believe both of these deals (including SPLASH acquisition) is positive as it allows Gamuda to crystallise its assets (ie. sales of SPLASH) while retaining its presence (revised O&M contract) in the water utility sector. The latter has been largely touted to see heavy investments in the near to medium term. Gamuda’s major earnings contribution still stand on solid fundamentals with current outstanding orderbook of RM6.5bn and unbilled property sales c.RM2.2bn, providing earnings visibility of up to FY21/22F.

Source: BIMB Securities Research - 23 Aug 2018