Period  2Q14/1H14

Actual vs. Expectations  Puncak’s 1H14 net profit of RM106.4m came in below expectations, accounting for 38% of our FY14 forecasts and 39% of consensus estimates. The negative variance was mainly due to: (i) lower-than-expected revenue from the water division following a rationing exercise in 2Q14 and (ii) slightly lower-than-expected O&G profits.

Dividends  None as expected.

Key Results Highlights QoQ, both 2Q14 revenue and net profit was up by 102% and 29%, respectively, thanks to resumption of Petronas’ T&I jobs in April 2014. The O&G segment delivered revenue and EBIT of RM154.2m and RM7.0m in 2Q14, after three consecutive quarters of losses.

 YoY, 2Q14 revenue (-4%) and net profit (-2%) were relatively flat mainly attributed to a water rationing exercise, which saw lower revenue as well as higher operating expenses in the water treatment division which EBIT declined by 24% to RM97m in 2Q14.

 YTD, overall, both 1H14 topline and bottomline declined by 13% due to the above mentioned reasons.

Outlook  Patience pays. After PNSB and SYABAS agreed in principle to be taken over by the Selangor state government with a price tag of RM1.56b, we are now waiting for the good news (definitive agreement) to be executed in the near term. We reiterate our view that Puncak will distribute part of its cash proceeds from the sale of its water concession assets as special dividends. Assuming that 5% of the proceeds is distributed to shareholders, we estimate a special dividend of 19 sen per share. This translates into a decent yield of about c.6% based on current price of RM3.27/share.

Change to Forecasts Revised lower our FY14E-FY15E net profit forecasts by 20%-9% to reflect the water rationing exercise coupled with lower-than-expected O&G contribution.

Rating Maintain OUTPERFORM

 Finally, Puncak, Selangor state and federal government have reached an agreed point of pricing for the valuation of the group’s assets and equity. This is after six years of deadlock. We believe the definite agreement between all the parties involved will be signed soon at least before the current Selangor MB’s term ends by end-November. As our valuation is based on the takeover price, we believe the current Puncak’s share price has yet to fully reflect its fair valuation.

Valuation  Post earnings revision in O&G division, we revised our SoPbased TP to RM3.99 from RM4.30 previously.

Risks to Our Call Prolonged water consolidation issues.

 Absence of special dividend.

 Disappointment in O&G earnings.

Source: Kenanga