Period  4Q13/FY13

Actual vs. Expectations Puncak’s FY13 core net profit of RM200.9m came in below expectations, accounting for only 75% and 76% of our and consensus full-year estimates, respectively. The negative variance was due to further losses in its O&G division following escalation of operating costs coupled with Petronas deferring jobs to 2014.

Dividends  No dividend was declared in 4Q13

Key Results Highlights QoQ, revenue and net profit declined by 11% and 59%, respectively, dragged by operating losses in its O&G division. The division registered operating losses of RM19.8m, on higher overheads incurred in its expansion plans to venture into more O&G sub-segments.

 YTD, earnings fell by 23%, no thanks to operating losses of both construction and O&G segments.

Outlook  Yesterday, KDEB made another takeover offer to PNSB and SYABAS with the same price tag of RM5.6b. The only difference is that there is a clause of “Arbitration of the proposed purchase of PNSB and Syabas”, where if Puncak does not agree with the offer price, Puncak is advised to proceed to international arbitration to reach a solution.

 We believe that arbitration will likely drag the deadlock even further. Elsewhere, it is widely speculated that the Federal government might have to top-up the existing RM9.65b offer tabled by the state. This news came out after the Federal and state government signed a MoU to restructure the water industry in Selangor. Nonetheless, so far, we have not seen any official announcement from the federal government that the latter will top-up the state’s offer, hence it is too pre-mature to assume anything.

Change to Forecasts We maintain our earnings forecasts for FY14 and FY15 with net profit growths of 26.7% and 3.7%, respectively, largely driven by the water and O&G divisions.

Rating Maintain MARKET PERFORM

 We believe Puncak can only be re-rated if KDEB, PAAB and all the water concessionaires reached an agreed “point” of pricing for the valuation of their assets and equities.

 Pending more concrete developments, we keep our MARKET PERFORM stance.

Valuation  We are maintaining our Target Price of RM3.50 based on SoP-derived valuation

Risks to Our Call  Prolonged water consolidation issues.

 Absence of special dividend.

 Absence of O&G jobs or lower-than-expected new contracts secured.

Source: Kenanga