After several futile attempts to restructure the water assets in Selangor over the past six years, the Federal Government finally stepped in by invoking Section 114 of the Water Services Act (WASIA) to take over the assets by April 2014. Although this will affect the water concessionaires, the good news is that the Langat 2 is likely to take off as soon as 2Q14. This will definitely benefit the water-related infrastructure contractors and downstream players. On the power sector, TENAGA is expected to report strong topline growth in the coming 2Q14 results, thanks largely to the 15% tariff hike. The unplanned outages at Tanjung Bin and Jimah Power Plants have already been rectified. TENAGA is expected to use more gas fuel in the next two quarters as Jimah is currently under scheduled maintenance shutdown. This also implies that the listing of MALAKOFF is likely to take place earliest end-2014 if not 2015. In all, our preference remains the Power Utility as the sector restructuring is heading in the right direction while we are still NEUTRAL on the Water Utility until the restructuring issue is settled. TENAGA remains as our TOP PICK for the sector given its re-rating story coupled with compelling valuation and significant FBMKLCI weighting.

WATER: Invocation of Section 114 in April. After several failed attempts to complete the Selangor Statement Government (SSG)’s proposed water assets restructuring, the Federal Government (FG) had finally stepped in by invoking Section 114 under the WASIA to take over the operations of water assets in April 2014. Recall, the latest offer by SSG in February 2014 to take over all the water concessionaires at the price tag of RM9.65b which had been rejected by PUNCAK (MP; TP: RM3.50) and GAMUDA (OP; TP: RM5.25). However, the Energy, Green Technology and Water Minister said that the water players namely PNSB, SPLASH and ABASS will continue owning the assets but will be monitored by administrators (i.e. PAAB, SPAN and SSG). Even so, we understand the FG still allows the SSG to negotiate with the concessionaires to agree on the take over price, especially with PUNCAK and GAMUDA. Meanwhile, PUNCAK has filed an application on 20 March 2014 in the Kuala Lumpur High Court to leave the issue to Judicial Review proceedings against the decision of SSG not to renew its raw water abstraction licenses beyond 31 May 2014.

Good news is LRAL 2 to take off soon! Good news is that after the invocation of the Section 114 under WASIA, the Langat 2 Water Treatment Plant and Distribution System Project (LRAL 2) will take off as agreed by both the Federal as well as the State Governments. We believe the project will start as soon as 2Q14. This will definitely benefit water-related infrastructure contractors and downstream players (pipeline producers). The Phase 1 of LRAL 2 consists of: (i) water treatment plant with capacity of 1,130 MLD, (ii) balance tank (2 with a capacity of 80-92m liters), (iii) storage tank (5 units with capacities ranging from 23-80m liters), and (iv) pipeline distribution (68km long with a diameter between 1.2 - 2.7m). Amongst the listed companies that we expect to benefit from the project are: MMCCORP (MP; TP: RM2.80), AZRB (NOT RATED), SALCON (NOT RATED), ENGTEX (NOT RATED), YLI (NOT RATED), JAKS (NOT RATED), and HIAPTECK (NOT RATED).

POWER: After the tariff hike, listing of MALAKOFF is the focus. While TENAGA (OP; TP: RM12.33) is expected to report strong topline growth in the upcoming 2Q14 results, thanks to the 15% tariff hike which took effect in January 2014, MMCCORP’s unit MALAKOFF (NOT LISTED) is still expecting at least another two quarters of choppy earnings due to the unplanned outage at its Tanjung Bin Power Plant which had just restarted this month. This also means the earliest timing for MALAKOFF IPO is end-2014 if not 2015. On the other hand, the unplanned outage at 1MDB’s Jimah Power Plant had been completed recently but it is now under the planned maintenance shutdown. With these coal-fired plant outages, TENAGA is expected to use more gas fuel in the coming two quarters.

Still PREFER Power with TENAGA as the TOP PICK. The Power Utility remains our preference over Water Utility given the expected sector-wide structural change in the Power segment as it progresses towards a full fuel cost-pass-through mechanism while the Selangor water structuring exercise is still murky, especially with regard to the fate of PUNCAK and GAMUDA after the invocation of Section 114. We continue to favour TENAGA as our TOP PICK for its rerating story coupled with still compelling valuation. We also like small cap PESTECH (OP; TP: RM4.93) for its explosive earnings growth story as an alternative power play. Meanwhile, we are NEUTRAL on YTLPOWR, PUNCAK and MMCCORP.

Source: Kenanga