Gamuda; BUY; RM4.43
Price target: RM5.40; GAM:MK

Following the MOU signed between the Federal government and Selangor State government on the takeover of the water assets in state and implementation of Langat 2 water treatment plant, Splash has received another offer from the Selangor State in its letter dated 26 February 2014. The terms of the offer are identical to the last offer made in November 2013 which is RM1,834.6m to acquire 100% equity of Splash. However, given this MOU, we expect there to be an element of ‘top up’ from the Federal government to entice concession holders to accept the offer. It was reported in the media that the Federal government will allocate RM2bn to the state to be used in the acquisition of the four concession holders.

The reasons given by Gamuda on why it was unable to accept the last offer in November 2013 are : i) a key component in the earlier offer letter dated 20 February 2013 was removed, which is the payment of Splash’s surplus book value of assets over liabilities (including receivables) resulting in c.90% reduction in the offer consideration for Splash as compared to the earlier offer; ii) the valuation methodology of using a return on Splash Equity of 12% p.a. is not fair as it does not take into account the remaining tenure of the concession and (iii) Kumpulan Darul Ehsan has not indicated in its Offer if it will retain the existing operations and maintenance operators of Splash at existing terms after the completio.

In our view, the fact that the Federal government is now leading the restructuring of water assets and willingness to add on to the offer made by the State is a positive step forward. This also removes the threat of invoking S114 of WSIA. However, it remains to be seen if the concession holders can come to some middle ground and minority shareholders of Gamuda can finally receive the special dividends from the sale. 

Source: HwangDBS Research - 28 Feb 2014