Highlights

Water tussle come to the end?... Puncak Niaga (Puncak) announced that it and Kumpulan Darul Ehsan Berhad (KDEB) have reached an agreement on the proposed acquisition of 100% equity in Puncak Niaga Sdn Bhd (PNSB) and 70% equity in SYABAS with a net cash consideration of RM1,555.3m.

The proposed takeover shall include the takeover of all assets and corresponding liabilities of PNSB in relation to its concession business only. The deal is subject to due diligence and legal documentation to be signed between the parties.

Comment

Favourable deal…The RM1.56bn net offer is the equity value for Puncak’s shareholder as all assets and liabilities of PNSB will be assumed by KDEB. This is above current market capitalisation of RM1.3bn.

Implied free O&G business…Puncak also owned 100% of GOM Resources which provides offshore transportation and installation services with over 20 years’ experience. Current share price has implied zero value to its O&G business which made average RM60-80m PAT per annum.

Earning visibility underpinned by RM1.8bn T&I contract…To recap, GOM Resources was awarded a T&I package B contract from Petronas with estimated value of RM1.8bn for duration of 3 years (with an option to extend for another year). The weakness for the O&G quarterly result is mainly due to delay of commencement of Petronas T&I job to April 14 with higher start-up costs which were also experienced by other services provider. We expect to see full contribution in FY15. With assumption of net margin of 10%, we expect it to generate RM60m PAT pa. By pegging at 12x P/E (conservative as compared to peers at 14x target P/E), O&G business should at least fetch value at RM720m or FD RM1.35 per share.

>RM1.5bn war chest to further grow O&G business…Puncak has set up at E&P division in 2012 to look for opportunities for marginal and brown fields. Given the huge war chest of >RM1.5bn after the resolution of water deal, we do not rule out any possibilities that Puncak will use part of the proceeds to invest in O&G division which will provide upside to our SOP valuation.

Valuation

Significantly below SOP…After the completion of takeover of PNSB and SYABAS, Puncak expects to receive RM1.56bn cash. By using sum part valuation, we arrive the fair value at RM4.87 (provides 56% of potential upside from current share price. after taken into account: the i) cash proceed of RM1.56bn from disposal of water business; ii) O&G business with valuation of RM720m; iii) enlarge share base from conversion of warrant and sukuk; and iv) holding company’s cash. We also do not rule out any possibilities of potential special dividend after the completion of takeover deal.

Source: Hong Leong Investment Bank Research - 11 Jun 2014