News  Puncak announced yesterday that it has entered into a conditional sale and purchase agreement (SPA) with

Pengurusan Air Selangor Bhd (PASB) for the proposed disposal of the entire equity interest and cumulative convertible redeemable preference shares (CCRPS) held in PNSB and 70% equity interest and redeemable convertible unsecured loan stocks (RCULS) held in SYABAS for a total cash consideration of RM1.56b.

 Out of RM1.56b cash proceeds that are expected to be received by Puncak, RM534.3m will be distributed to shareholders and the remaining RM1.02b will be kept for future investments.

 Barring any unforeseen circumstances, the proposed disposals are expected to be completed in 1Q15.

Comments  No surprise on the SPA... The announcement came in as no surprise as Puncak had earlier agreed in principle to be taken over by Selangor state government.

 … but big surprise on special dividend quantum. Nonetheless, a big surprise was the 34% of the proceeds

or RM534.3m to be distributed to shareholders. It is equivalent to RM1.00 per share (fully diluted), way higher than our expectation of only 19 sen per share (fully diluted) previously. This implies 29% yield based on the current price.

Outlook  What’s next? As the Selangor water assets contribute almost all of the group’s profit, there will be a very huge earnings vacuum for Puncak. The group has yet to identify what sort of future investments that they will venture in to fill up the gap.

 Nonetheless, Puncak mentioned that it would expand within its core businesses, i.e. Oil & Gas (expected to be major earnings contributor), water treatment plant and construction divisions. In addition, Puncak is also exploring opportunities in other business segments namely the plantation sector.

Forecast  Unchanged pending completion of the exercise. Assuming the exercise is completed in 1Q15, our FY15E earnings forecast will be adjusted to RM52m from current forecast of RM299m.

Rating Maintain OUTPERFORM

 Finally, Puncak, Selangor state and federal governments have reached an agreed point of pricing for the valuation of the group’s assets and equity. This is after six years of deadlock. More importantly, Puncak will distribute RM1.00 per FD share out of the total RM2.89 proceeds per FD share.

 Nonetheless, post-special dividend payout (est. 3-6months from now), we might consider reviewing our call and valuations with downward bias as we could not ascertain what will be the group’s future direction after the sale of its water assets.

Valuation  Maintain our SoP-based TP of RM3.99.

Risks to Our Call  Disappointment in O&G earnings.

Source: Kenanga