We are maintaining our OUTPERFORM call on Puncak Niaga Holdings Bhd (“Puncak”) with an unchanged TP of RM3.50. Recall, the TP revision in our Strategy report dated 3 July 2013, premised on the higher valuation of its O&G division. Recently, we met up with Puncak’s CFO, Mr Danny Ng for an update, especially after the stock price touched its 2-year high of RM2.78 on 5  July 2013 following the news of federal government’s intention to resolve the industry’s consolidation impasse. We came away from the meeting feeling Positive on Puncak and could potentially be valued at RM3.50-RM5.00 based on our scenario analysis. In line with our Dark Horse view on Puncak since last year, we observe that the stock is gradually gaining appreciation by investors. We advocate investors to increase exposure to Puncak as we believe the current share price has yet to reflect its fair valuation.

Remain hopeful on the water industry impasse to be resolved before end-year.  Despite media news suggesting that the federal government and Selangor state government (“SSG”) are in discussions to work on a resolution, Puncak has yet to receive any call neither party for discussion. Nonetheless, Puncak remains hopeful that this long-drawn issue will reach a workable solution before end of this year. 

“Last offer will be the final offer”.  Various media news quoted Chief Minister of Selangor, Tan Sri Khalid Ibrahim mentioning that the last offer of RM9.65b offered by the SSG in February 2013 will be the final offer. As for Puncak, recall SSG offered a total equity value of RM5.6b for PNSB and its 70%-owned Syabas. Assuming the deal goes through smoothly as of which (i) SSG agrees to pay all the outstanding Puncak’s receivables amounting to RM2.7b owed from tariff compensation; (ii) PAAB is  agreeable to fund the surplus of Puncak’s water asset (if any); and (iii) the price tag of RM5.6b remains the same, Puncak’s is fairly valued at between RM3.50 – RM5.00 per share (refer next page). 

O&G updates: Continue eyeing wide scope of jobs. Puncak is currently working to increase the contribution of its lucrative O&G division. In FY12, the division registered RM70m net profit mainly driven by its subsidiaries of GOM Resources and KGL Ltd that is currently the second largest OIC player. Going forward, Puncak is eyeing projects of greater magnitude such as EPCIC and RSCs to increase its O&G contribution. In the EPCIC space, it has recently formed a tie-up with Yiu Lian, one of the world’s biggest dockyards operators.

Eyeing sewerage projects in Malaysia. Recall, Puncak proposed to raise up to RM165.0m via issuance of convertible sukuk at a conversion price of RM2.00. One of the main reasons for the corporate exercise is to acquire assets related to the treated water, wastewater, and environment sectors. To date, Puncak is still looking for new opportunities in this particular sector. 

Maintain OUTPERFORM.  Pending clearer picture on the consolidation of Selangor water industry, we are maintaining our Outperform call and TP of RM3.50 based on SOP-derived valuation. Although we noticed that there is a change in the accounting treatment where under MFRS10, its 70%-owned Syabas is now booked as a “Joint Venture” company due to the absence of unilateral control, it will not change the cash flow or the Group’s bottom-line. Hence, our net profit forecasts remain intact.

Source: Kenanga