After 6 years of deadlock, on 10 June 2014, Puncak has finally reached an agreement with Selangor State Government (SSG) to take over its water concession assets (100%-owned PNSB and 70%-owned Syabas) at an equity value of RM1.56b. More importantly, this time around, we gather that SSG and the Federal Government (FG) will complete the proposed restructuring exercise of all the water concession assets without SPLASH. This means that we can expect Puncak to receive cash of RM1.56b of which part of the proceeds could be distributed to shareholders as special dividends. All in, we upgrade Puncak to OUTPERFORM from MARKET PERFORM with a higher TP of RM4.30 from RM3.19 to reflect that the water deal is nearly completed. The call is also inline with our Water Sector upgrade as well.

Puncak finally reached agreement. Puncak announced on 10 June 2014 has reached an agreement in principle with SSG on the proposed acquisition of 100% equity in PNSB and 70% equity in SYABAS at a price tag of RM1.56b. Other fundamental terms and condition that have to be fulfilled by SSG are: (i) the proposed takeover of PNSB and SYABAS by SSG, which shall include the takeover of all assets and liabilities of PNSB in relation to its concession businesses, (ii) the nonconcession-related assets, liabilities and businesses of PNSB shall be returned to Puncak by SSG at no cost, (iii) the takeover is subject to due diligence inquiry being satisfactory to KDEB, Puncak and PAAB, (iv) the proposed takeover of PNSB and SYABAS by SSG is conditional upon the approval of the Puncak’s shareholders which is to be obtained at the EGM (to be convened in due course). The announcement is consistent with the SSG’s press statement on 10th June 2014. Negotiations regarding SPLASH will be done separately and we gather they are in the midst of discussions currently.

Tan Sri Rozali Ismail to vote in favour of the takeover. It is also reported in SSG’s press statement that Tan Sri Rozali Ismail (the major shareholder who owns 41.3% in Puncak) has expressed his intention to vote in favour of the takeover at the EGM. Other major shareholders include Lembaga Tabung Haji (5.5%), OCBC Ltd (5.1%), and EPF (5.1%).

Special dividend soon? After the absence of dividends announcement for 5 quarters, we believe Puncak will distribute part of its cash proceeds from sale of its water concession assets as special dividends. We believe this is to reward its loyal shareholders, which have held positions in Puncak after 6 years of water deadlock. Assuming that 5% of the proceeds will be distributed to shareholders, we estimate a special dividend of 19 sen per share. This translates into a decent yield of about c.5% based on current price of RM3.71/share.

To focus on O&G business. We understand that bulk of the proceeds from the sale of the Selangor’s water concession assets will be utilized to purchase quality O&G asset(s) as part of its expansion plans. As of now, Puncak’s O&G division only has 1 major O&G construction asset, namely Derrick Lay Barge. We estimate the group’s outstanding orderbook in the O&G segment currently stands at RM1.8b which are mostly the Petronas (T&I jobs) which was secured end of last year.

Building up the construction orderbook. We estimate Puncak’s construction unit has about RM544m  utstanding orderbook, providing 2 years earnings visibility. Most of these contracts were secured in the last 6 months. The latest construction job secured is in Sarawak (supply, jointing and laying of delivery and pumping pipelines, construction and completion of 3 water reservoirs and three 3 booster stations) worth about RM53.4m; it is also the second contract secured from Sarawak this year. Going forward, we believe the group could secure more water-related jobs in Sarawak judging from the state’s drive to expand and improve its water infrastructure. We also do not discount the possibility of securing water-related jobs in Peninsular Malaysia judging from its expertise. We have estimated about RM500m orderbook replenishment for FY14-FY15.

Upgrade to OP from MP with higher valuation. Finally, there is light at the end of the tunnel when SSG and Puncak reached an agreement. Thus, we decided to upgrade Puncak to OP from MP with higher TP of RM4.30 from RM3.19 previously. Our higher TP is after (i) we take into account the net cash position that the group has currently at the holding level, (ii) valuing Puncak's construction business at 9x FY15 earnings, (iii) valuing some of its other assets that will be left after the sale of PNSB and SYABAS' assets at about RM159.8m, (iv) narrowing its SoP discount to 10% from 20% previously in our SOP as things are almost certain that Puncak will be selling its water concession assets to SSG.

Source: Kenanga