Puncak Niaga (Puncak) said there is a high possibility that the board may ask for an increased office price for the disposal of its water assets. Note that Air Selangor is still not able to fulfil the conditions precedent in the sale and purchase agreement (SPA) and the fourth deadline 11 May 2015 has passed.

Puncak is supposed to receive RM1.56bn under the existing SPA, but may ask for an increased offer price for the following key reasons:

i) the basis of the office price of RM1.56bn was derived based on a 12% return of investment calculated up to 2012, and that Puncak has not been accorded any returns for 2013 and 2014 and YTD;

ii) Puncak had to forego and lost several  investment  opportunities  in  the  last  few  months  as  the  SPA  was supposed to be completed in Jan15;

iii) decline in RM against USD resulted in higher overseas investment cost; and

iv) the imposition of GST resulted in increased operating costs. (Source: Bursa)

Comments:  While  the  uncertainty  surrounding  Puncak’s  water  asset disposal is negative, the possibility that Puncak may seek a higher price for its  water  assets  does  not  come  entirely  as  a surprise due to  the  ongoing delays. We view the news positively as any compensation for the delays in the water asset disposals would act to strengthen the support of its share price.

Recall  that  the  delays  in  the  water  asset  disposals  is  centred  on  a dispute  which  materialised  after  the  federal  government  claimed  the Semenyih and Bukit Nanas reservoirs, together with all the water pipelines in Selangor, are under Putrajaya’s management and ownership, while the Selangor  ruling-party,  Pakatan,  said  the  assets  belong  to  the  Selangor government. We maintain our Neutral rating on Puncak with unchanged TP of RM2.70.

Source: Affin Hwang Capital Research - 12 May 2015