Yesterday, PUNCAK (MP; TP: RM3.50) and KPS (Not Rated) announced that they have each received a faxed letter from Lembaga Urus Air Selangor (LUAS) informing that the concessionaires’ raw water extraction license will expired 31st May 2014. This referred to all water concessionaires that currently own the treatment plant namely PNSB, SPLASH, and K.ABASS. LUAS further informed in the letters that the above decision was made pursuant to the ongoing restructuring of water services industry in Selangor. The aforesaid decision shall remain in force until further instruction is issued by the Selangor State Government (SSG). Although we were not entirely surprised with the news, we view it negatively as this may prolong the already long-drawn Selangor’s water consolidation issues. The non-renewal raw water extraction license means the treatment plant operators can no longer source for raw water in the state. Hence, there will be no more water supply to water distributors i.e. Syabas, from these concessionaires. This might affect the entire Klang Valley. Nonetheless, we believe that this could only be a tactical move by SSG to force the concessionaires to accept the recent takeover offer of RM9.65b by the former. These concessionaires are given until 10th March to accept the offer. However, we understand that the concessionaires will not simply accept this move by the SSG to terminate the licenses and will seek legal advice. Pending more development, we are maintaining our NEUTRAL stance in line with our MARKET PERFORM rating on PUNCAK (TP: RM3.50) pending more development.

Negative development. We view this news negatively as this may prolong the already longdrawn Selangor’s water consolidation issues. Nonetheless, we believe that this could only be a tactical move by SSG to force the concessionaires to accept the recent takeover offer of RM9.65b. The deadline of the acceptance of the offer is in the next 3 days, 10th March 2014. However, the big question remains, will these concessionaires especially SPLASH will accept the same value of the offer as in Dec 2013? Recall in Dec 2013 SSG offered to takeover these assets with the price tag of RM9.65b; nonetheless, SPLASH has rejected the offer deeming it too low.

Impact to financials if there is no raw water extraction license. The non-renewal raw water extraction license means the treatment plant operators can no longer source for raw water in the state. Hence, there will be no more water supplies to water distributors, i.e. Syabas from these concessionaires. This might affect the entire Klang Valley. As for Puncak, we estimate that 80% of its earnings will be eroded if they cannot extract raw water anymore. We also estimate Gamuda (OP; TP: RM5.25) will lose about at least RM70m- RM80m per annum which about 14% of its net profit if SPLASH is prohibited from extracting raw water.

Concessionaires might seek legal advice. We understand from Puncak’s management that they will seek for legal advice regarding this matter. We also do not rule out possibilities that other concessionaires, such as SPLASH, may seek for legal advice to solve the current issue.

Maintain NEUTRAL. This negative development reinforces our view that the Selangor water consolidation's deadlock will continue into the near-medium term. Although SSG and Federal government have already signed MoU to resolve this issue, they still failed to reach a point of agreement for the latter's asset and equity pricing/valuation of the takeover. Hence, our NEUTRAL stance is maintained. We are also maintaining Puncak's earnings forecasts and its Target Price of RM3.50 pending further development.

Source: Kenanga