According  to  the  Energy,  Green  Technology  and  Water  Minister,  the Federal  Government  (FG)  has  allocated  an  additional  RM3bn  to  help the  Selangor  State  Government  (SSG)  take  over  the  water concessionaires in Selangor. He added that the additional allocation is based on the premise that the Langat 2 water treatment plant project will go on and that Selangor negotiate  with the concessionaires under the supervision of the Ministry on a willing-buyer-willing-seller basis. (Source: The Edge Financial Daily)

Comment: From the press report, it is unclear if the RM3bn is in addition to  what  the  FG  pledged  earlier  to  resolve  the  Selangor  water restructuring  deadlock.  If  it  is,  it  would  be  positive  news  for  Gamuda, which has a 40% stake in SPLASH. PNSB, SYABAS and ABASS had accepted  the  SSG  offer  of  RM2.5bn,  RM3.1bn  and  RM1.0bn respectively. SPLASH had not accepted as the SSG offer as the equity value  of  RM251m  was  substantially  below  its  net  asset  value  of RM2.54bn.  A  higher  and  fairer  valuation  for  SPLASH  hence  would require additional outlays by the SSG and/or FG. We continue to believe that the shareholders of SPLASH will be able to negotiate a fair pricing for the concession with the FG.

We maintain our ADD rating for Gamuda with an unchanged target price of RM5.30.

Source: Affin Hwang Capital Research - 6 Nov 2014