MIDF Research has revised downwards its financial year 2010 and 2011 profit projections for Puncak Niaga Holdings Bhd to 6.2 per cent and 9.2 per cent respectively amid weaker-than-expected second quarter performance.

'Margins recovery may not be significant as we expect interest expense to move up, underpinned by the rising interest rate environment,' it said in its equity note today.

MIDF Research has maintained 'trading buy' on Puncak Niaga.

It said speculations could persist over the issue of the transfer of its water assets, which may provide a near term catalyst for price appreciation.

'The prolonged saga to restructure the state water sector continues and we remain skeptical that it could be completed any time soon,' it said.

MIDF Research said political willpower is needed to resolve the current impasse between the state government and water concessionaires.

The research house said Puncak Niaga posted a 19 per cent year-on-year lower revenue in second quarter 2010 and it was due to lower compensation booked in the quarter.

Nonetheless, for the first half, revenue rose two per cent year-on-year on higher volume.

Gross margin in second quarter decreased by 11 percentage points from the same quarter last year to 33.7 per cent, while gross margin for first half was four percentage points lower to 34 per cent.

In addition, interest expenses increased significantly by almost nine per cent year-on-year that contributed to margins erosion. -- Bernama