Reiterate OVERWEIGHT on Water sector premised on the following new evelopments: (i) Master Agreement to restructure the Selangor water industry had finally been signed by both Federal government and Selangor State government (SSG), (ii) the share sale agreement between SSG and the concessionaires will be entered in the near term according to the Master Agreement, and (iii) SPLASH will likely resume negotiation with the new Selangor Chief Minister (CM) to resolve its takeover pricing issues. We also reaffirm our view that it is highly likely that special dividends would be distributed to Puncak (OP; TP: RM3.99) and Gamuda (OP; TP: RM5.52) shareholders once they dispose their water assets.

Water Master Agreement finally signed by both SSG and Federal government. Before the previous Selangor Chief Minister Tan Sri Khalid Ibrahim resigned, on 12^th September 2014, both SSG and Federal government (via PAAB) signed a “Master Agreement” to end the state’s water restructuring exercise. This was after both parties signed MoU and HoA on 26th February and 1st August 2014, respectively. In the agreement, (i) SSG’s SPV, Pengurusan Air Selangor Sdn Bhd (PASSB) will take over the 3 concessionaires that accepted the offer i.e. SYABAS, PNSB, and K.ABASS, (ii) PAAB will allocate RM1.68b to facilitate the takeover of the concessionaires, in line with MoU and HoA that were previously signed by both parties, (iii) PAAB will take over all the concessionaires’ liabilities worth approximately RM7.45b. In return, SSG will transfer all the water assets to PAAB, on a leasehold basis for a period of 45 years, (iv) PASSB will lease back the assets from PAAB on which the latter will charge certain rates agreed by both parties through “Facilities Agreement” and “Lease Agreement”.

Share sale agreement with concessionaires to be signed soon. With Master Agreement already signed, PASSB will soon enter into a share sale agreement with the 3 concessionaires i.e. SYABAS, PNSB, and K.ABASS. To recap, total SSG’s offer value to buy the whole Selangor water assets including SPLASH are RM9.65b of which RM2.0b was the equity value and the remainder RM7.7b the liabilities to be assumed by PAAB. Excluding SPLASH, the equity value is RM1.72b.

SPLASH to resume negotiation with new Selangor CM? In the press statement by Federal government, it was mentioned that Federal government is committed to be the facilitator for the takeover of SPLASH by SSG. In addition, we gather that SPLASH will resume its negotiation with the new Selangor CM to resolve its takeover pricing issues. This could herald in a satisfactory resolution. We also gather that the invocation of Section 114 to forcibly acquire the SPLASH has already subsided. To recap, Sweet Water Alliance Sdn Bhd (30%-owned) and Gamuda (40%-owned) (OP; TP: RM5.52) rejected the SSG’s offer to take over their concession assets SPLASH due to pricing issue. SSG has only offered them 10% of the SPLASH’s book value of RM2.5b. Note that we have already factored in SPLASH’s book value of RM1.0b (at Gamuda’s level) in Gamuda’s SoP-derived TP.

New Selangor CM’s review of the water deal would unlikely to delay the restructuring exercise. Despite the fact that the new Chief Minister (CM) of Selangor will review the water deal sealed by previous state’s administration, we reaffirm our view that the state’s water restructuring can still be completed in the near term (3-6 months). This is due to the fact that: (i) the final or Master Agreement to restructure the whole state’s water industry had already been inked after they signed both MoU and HoA agreements, (ii) three existing concessionaires (SYABAS, PNSB, and K.ABASS) had agreed in principle to be taken over by Selangor State Government (SSG) with the equity value of RM1.72b.

We also reiterate our view that there could be special dividends for Puncak and SPLASH shareholders once they complete the disposal of their assets. As for Puncak, assuming that 5% of the expected RM1.56b proceeds will be distributed to shareholders, we estimate a special dividend of 19 sen per share. This translates into a decent yield of 5.7% based on current price of RM3.35/share. Meanwhile, as for Gamuda which owns 40% stake in SPLASH, if SSG offered them RM2.5b (book value), Gamuda will be getting RM1.0b cash proceeds from the disposal. Assuming all of the proceeds are distributed to shareholders as special dividends, it will translate into 40 sen/share or 8.1% yield for Gamuda’s shareholders.

Maintain OVERWEIGHT premised on the following new developments: (i) Master Agreement to restructure Selangor water industry had finally been signed by both Federal government and SSG, (ii) the share sale agreement between SSG and the concessionaires will be entered in the near term according to the Master Agreement, (iii) SPLASH would likely resume negotiation with the new Selangor CM to resolve its takeover pricing issues. We also reaffirm our view that it is highly likely that special dividends would be distributed to the Puncak (OP; TP: RM3.99) and Gamuda (OP; TP: RM5.52) shareholders once they dispose their water assets.

Maintain OUTPERFORM on GAMUDA (TP: RM5.52) and PUNCAK (TP: RM3.99). In terms of share prices performance, both stocks’ prices have been sluggish of late due to the recent Selangor CM saga. We advocate investors to accumulate these stocks as their valuations have yet to fully-priced the fact that (i) the Master Agreement has been signed to proceed with the restructuring and (ii) commitment from the Federal government to resolve the SPLASH takeover.

Source: Kenanga