Period  1Q14

Actual vs. Expectations Puncak’s 1Q14 net profit of RM46.5m missed expectations, accounting for only 14% and 18% of our full-year forecast and consensus estimates, respectively. The negative variance was mainly due to continued losses in the group’s O&G division following Petronas further deferring T&I job to mid-April 2014.

Dividends  As expected there was no dividend declared in 1Q14.

Key Results Highlights QoQ, net profit doubled to RM46.5m from only RM23m in 4Q13. The strong profit was mainly attributed to higher latepayment interest charged to SYABAS. Water treatment segment rose 127% to RM126.7m despite flattish revenue (+1%) in 1Q14.

 YoY, however, revenue and net profit both declined by 25% and 23% mainly due to continued O&G division’s losses. The division has continued to make losses (LBIT: RM18.1m), attributed by deferment of Petronas T&I jobs to mid-April 2014 and higher operating costs.

Outlook  We understand Puncak Niaga is currently in the midst of discussions with the federal government (FG) and Selangor state government (SSG) to resolve the long-standing Selangor water consolidation issues.

 We view that even if Puncak agreed on the previous offer price of RM1.56b equity value from SSG, it would make no difference if SPLASH’s shareholders i.e. Gamuda (OP; TP: RM5.50) and Sweet Water Alliance (SWA) reaffirm their decision to not accepting the SSG’s previous offer to SPLASH amounting to RM250m equity value. Recall, Gamuda (OP; TP: RM5.50) and SWA did not agree with SSG’s offer price of RM250m to SPLASH, deeming the offer price as extremely low (i.e. 0.1x PBV) for SPLASH.

 On a flipside, if SPLASH agrees on SSG’s offer price or even better SSG/FG raises its offer price according to amount required by SPLASH, we will see a major re-rating on the WATER sector as a whole and we are likely to upgrade PUNCAK’s recommendation to OUTPERFORM with higher TP of RM3.99 from RM3.19 currently.

Change to Forecasts    Revised lower our FY14-FY15 net profit forecasts by 17% and 2% to reflect the further delay of Petronas T&I jobs.

Rating Maintain MARKET PERFORM

 We believe Puncak can only be re-rated if SSG, PAAB FG, 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  Post earnings revision, we revised our SoP-based TP to RM3.19 from RM3.50 previously.

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