Selangor's  Menteri  Besar  has  written  to  the  Energy,  Green  Technology  and  WaterMinister  to  proposing  to  take  over  the  state  water  service  concessionaire,  Syabas SB. We are unmoved by this move as we do not see a takeover as possible without prior  consent  from  Puncak  Niaga,  its  shareholders  and  creditors,  plus  the  Federal Government,  which  holds  a  golden  share  in  the  company.  We  also  rule  out  the possibility of any offer from the state government being acceptable to Puncak since the  polls  are  just  around  the  corner.   Hence,  we  keep  our  Trading  BUY  call  on  the stock  given  its  undemanding  valuation  and  rising  contribution  from  its  O&G division. Our FV stands at RM2.08.

New tussle. The Malaysian Insider quoted a statement from Selangor Menteri Besar (MB) Tan Sri Abdul Khalid Ibrahim saying that the Selangor government  wants to take over the state water service provider Syabas SB in two weeks. He also claimed that he has received the  green  light  from  Deputy  Prime  Minister  Tan  Sri  Muhyiddin  Yassin,  who  is  also  the chairman  of  the  Cabinet  Committee  on  Water.  The  MB  said  the  state  government  has written  to  the  Energy,  Green  Technology  and  Water  Ministry  to  notify  the  latter  of  its proposal to take over the concessionaire within 14 days. 

Not  the  first  time.  This  is  not  the  Selangor  government's  first  attempt  to  take  over  the concessionaire,  having  made  its  first  offer  back  in  2009.  We  suspect  the  state government's  latest  move  may  have  been  sparked  by  the  recent  spate  of  water  supply disruption due to faulty pumps at the Wangsa Maju pump house. As the details are sketchy at this juncture, we are unsure if the takeover referred to in the statement represents a new offer to take over Syabas SB, or if it is merely action taken by the state government against Syabas for having failed to fulfill certain terms and conditions stipulated in  its Concession Agreement.   

No  immediate  solution  in  sight.  We  suspect  that  the  verbal  tussle  between  the  state government  and  Syabas  SB may  continue  at  least until  the  conclusion  of  the  ever  closer upcoming General Election. Although the state government owns a 30% stake in the water supply  company  via  Kumpulan  Darul  Ehsan  and  Kumpulan  Perangsang  Selangor,  it remains a minority shareholder with a limited two seats on the company board. Therefore, any  takeover  would  need  the  consent  from  its  major  shareholder,  Puncak  Niaga  (70%), which  in  turn  will  require  the  blessings  of  its  shareholders  and  creditors.  As  the  Federal Government, through the Minister of Finance Inc., also holds one golden share in Syabas SB,  its  written  consent  needs  to  be  obtained  prior  to  any  asset  disposal  or  merger. Meanwhile,  we  also  rule  out  possibility  of  the  state  government  making  any  acceptable offer  for  the  remaining  stake  in  Syabas  SB  considering  that  the  election  polls  could  be called  anytime  in  the  next  few  months.  Besides  these,  the  state  government  would  also need to go through the normal legal process before it can revoke any concession.  

Reiterate  Trading  BUY.  As we think the tussle with the state government to prolong, we instead focus on the company undemanding valuation. We reckon the major improvements to the company's bottomline the late were mainly attributed to compensation for the non-implementation of higher water tariffs and did not involve any physical cash inflow until the court delivers its judgement. Nonetheless, the improvement in P&L is indeed a sentiment booster. In addition, the group's successful move into the lucrative O&G field on top of its rural water supply projects are also sufficient reasons for investors to cheer. Therefore, we are maintaining our Trading BUY recommendation, with the stock's fair value kept at RM2.08. This implies a mere 3x forward FY12 EPS.

Source: OSK