Listed water concessionaires namely PUNCAK (MP; TP: RM3.24), GAMUDA (OP; TP: RM5.30) and KUMPULAN PERANGSANG SELANGOR (KPS) (NON RATED) announced that they had made a decision and respond to the KDEB’s final offer dated 21st November 2013. To recap, KDEB is offering the water concessionaires at RM2.0b and RM7.7b for their Equity Value and liabilities to be assumed by PAAB. While KPS accepted the offer, Puncak (owns 100% of PNSB and 70% of Syabas) also accepted but subject to terms and conditions to be agreed by KDEB. As for Gamuda that owns 40% of SPLASH, it has rejected the offer. Amongst the key issues are as follows: (i) key component as stated in the previous offer dated 21st February namely payment of surplus book value of assets over liabilities was removed, (ii) the valuation methodology of using ROE 12% p.a. was not fair, (iii) long due receivables from Syabas to WTP operators incurred from tariff hike compensation should be included in the offer. Although we understand that both Puncak and Gamuda still have room for discussions with KDEB, we are NEGATIVE on this development as we believe there will be another round of “deadlock” as was the cases of 1st – 4th offer, hence further delay the state’s water consolidation exercise. On a flipside, if KDEB is able to fulfil Puncak’s “wish lists”, there will be huge upside for them on top of what is in their table now.

Puncak’s terms and conditions will provide further upside. Puncak responded to KDEB’s offer letter dated 21st November 2013 yesterday and announced that, it will only fully accept KDEB’s offer if: (i) the total equity contribution to be paid to Puncak shall include a compounded return of 15% p.a. instead of 12% in the offer, (ii) the receivables due and outstanding from SYABAS to PNSB will be paid, (iii) any and all residual cash in PNSB (inclusive of (ii) above) and SYABAS shall be paid, (iv) removal for the due diligence post acceptance of the Offer. The KDEB’s offer of RM1.56b equity value is actually excluding any receivables and potential surplus value of assets over liabilities. Hence, if KDEB agrees to fulfil all the Puncak’s wish lists, it is rather clear that Puncak will pocket cash more than RM1.56b (RM2.89/share). Even KDEB only agreeable to fulfil (i) and (ii),we estimate potentially Puncak will pocket cash of RM3.6b (RM6.62/share). This is based on assumptions of compounded ROE of 15% and estimated RM1.9b of net receivables. Puncak has given KDEB to revert back within 7 days from yesterday.

Gamuda’s 40%-owned SPLASH’s rejection is understandable? Gamuda is unable to consider the offer as: (i) key component in the earlier offer letter was removed, namely the payment of SPLASH’s surplus book value of assets over liabilities (including receivables) which has resulted in the substantial amount of surplus assets of SPLASH not being added to the Offer. This has resulted in an approximately 90% reduction in the offer consideration for SPLASH Holdings as compared to the earlier offer, (ii) the valuation methodology of using a ROE of 12% per annum is not fair as it does not take into account the remaining tenure of SPLASH’s concession. (iii) KDEB has not indicated in its Offer if it will retain as an O&M operators of SPLASH at existing terms post-exercise. Our check with Registrar of Company (ROC), SPLASH’s book value as at 31st March 2012 stood at RM1.56b and it registered a net profit of RM338m. If KDEB’s equity value offer is only RM250m which is the only cash that SPLASH would gain, it is very clear reason why Gamuda reject the offer as it only translates to only 0.2x and 0.74x FY12 PBV and PER.

Downgrade to NEUTRAL, expect deadlock to continue. Despite there could be further upside for Puncak if all of its terms and conditions fulfilled, there is still uncertainty remains at Selangor State government end. Hence, we downgrade the sector to NEUTRAL from OVERWEIGHT mainly due to the unfavorable outcome of response from the water concessionaires, i.e. Puncak and Gamuda. The delay of the consolidation exercise will not only affect the water operators, but it will also affect the whole Selangor water industry as Langat 2 and NRW reduction programme will not be taken off pending completion of consolidation exercise. We are now imputing discount of 20% into Puncak’s SOP-derived valuation to reflect further potential delay in the exercise. Hence, downgrade Puncak to MARKET PERFORM from OUTPERFORM with revised Target Price of RM3.24 from RM4.05. We are maintaining Gamuda’s OUTPERFORM rating but with slightly lower TP of RM5.25 from RM5.30 after we have only imputed SPLASH’s book value instead of Selangor’s Equity value in our SOP.

Source: Kenanga