SPLASH was offered RM2.55bn takeover price by Pengurusan Air Selangor. This represents 28% discount on net book value of SPLASH as of June 30, 2018, which stood at RM3.54bn. This transaction will be structured with upfront cash payment of RM1.9bn while the remaining RM650m will be paid over 9 years with accrue interest rate of 5.25% per annum. Taliworks will receive c.RM382m upfront receivable payment (32 sen per share) assuming similar transaction structure with SPLASH deal. We expect Taliworks will continue to run the operations and O&M for SSP1 water treatment plant due to tripartite agreement signed with Selangor state government. Maintain forecast. Downgrade to HOLD with unchanged SOP-driven TP of RM1.29 as we feel the recent strong share price performance has reflected the optimism of the water deal.

NEWSBREAK

Takeover of SPLASH. Syarikat Pengeluar Air Selangor (SPLASH) was offered RM2.55bn takeover price by Pengurusan Air Selangor. This represents 28% discount on net book value of SPLASH as of June 30, 2018, which stood at RM3.54bn. This transaction will be structured with upfront cash payment of RM1.9bn while the remaining RM650m will be paid over 9 years with accrued interest rate of 5.25% per annum.

HLIB’s VIEW

Receivables. We understand that negotiation regarding RM638m receivables (as at 1Q18) owed by SPLASH to Taliworks is undergoing at this juncture. Assuming similar discount with SPLASH deal (28% discount) and transaction structure (75% upfront cash payment, 25% instalment),Taliworks will receive c.RM382m upfront receivable payment (32 sen per share) with the balance in instalment. Under this scenario Taliworks is expected to write back a small amount of recovered receivables as carrying value of receivables is c.RM452m.

Tripartite agreement. Post finalization of SPLASH deal, we believe Taliworks will continue to run the operations and maintenance (O&M) operations for SSP1 water treatment plant. This is because a Tripartite agreement had been signed between the Selangor state government, SPLASH and Taliworks and the agreement allows Taliworks to negotiate directly with Selangor government, should SPLASH no longer requires its services. However, we do not discount the possibility that there will be changes to the terms under current agreement that is expiring in 2030.

Special dividend. Assuming special dividend of 32 sen being paid, the implied ex special dividend share price would be 98 sen (vs current share price of RM1.30). Moreover, Taliworks is expected to continue the dividend policy of 8 sen per annum post SPLASH deal as the O&M operation is expected to be cash-flow positive. Hence, 8 sen dividend translates to c.8.2% dividend yield.

Forecast. Maintained.

Downgrade to HOLD, TP: RM1.29. Downgrade to HOLD with unchanged SOP driven TP of RM1.29 as strong share price performance over the past 2 months (+53%) has reflected the optimism of finalization of SPLASH deal. Moreover, discount on receivables recovered maybe higher than expected and magnitude of special dividend may disappoint.

Source: Hong Leong Investment Bank Research - 6 Aug 2018