Maintain OVERWEIGHT on the Water sector premised mainly on the expectations of special dividend payments from PUNCAK (OP; TP: RM3.99) that will be distributed to investors in the near-term. This is after six years of deadlock. As for SPLASH, we understand the Selangor state government is currently in active negotiation with the concessionaire to resolve the pricing issues. We expect they will reach a final conclusion soon in the near-medium-term. Hence, we reiterate our view that these M&A activities will lead to special dividends for shareholders. In fact, as for PUNCAK, the company has already agreed to distribute RM1.00/share to the shareholders as special dividends. All in, we advocate investors to accumulate PUNCAK now given that its current price is below that of PASB’s offer price of RM2.89/share.

PUNCAK signed SPA with PASB. PUNCAK announced on 11th November 2014 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 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. Barring any unforeseen circumstances, the proposed disposals are expected to be completed in 1Q15. Although the announcement was not a surprise, the key clincher is that this marked the end of a 6-year saga between PUNCAK, Selangor State Government (SSG) and Federal Government.

Special dividend for PUNCAK’s shareholders. 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. The special dividend is equivalent to RM1.00/PUNCAK’s shares (fully diluted), way higher than our initial expectation of only 19 sen per share (fully diluted). Dividend payment of RM1.00/shares implies a huge 40% yield based on PUNCAK’s current price. 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 yet the group’s future direction after the sale of its water assets.

SPLASH is in fresh negotiation with Selangor CM. On the other hand, SPLASH, the only concessionaire that has yet to ink the deal with SSG, is currently in active negotiation to resolve their valuation issues. We expect they will reach final conclusion soon in the near-medium-term. To recap, Sweet Water Alliance Sdn Bhd (30%-owned) and GAMUDA (40%-owned) (OP; TP: RM5.29) 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. For illustration purposes, if GAMUDA is to settle its 40%-owned SPLASH to SSG at 50% below than book value, our SOP will be revised downward to RM5.09 from current TP of RM5.29. To recap, GAMUDA has already made a decision that they will not accept the offer anything lower than book value.

Maintain OVERWEIGHT, accumulate PUNCAK (OP; TP: RM3.99). Hence, all in, we are maintaining our OVERWEIGHT call on the water sector premised mainly on the expectations of special dividend payments from PUNCAK that will be distributed to investors in the near-term. In term of share price performance, despite all the positives, PUNCAK’s share price is still trading below its disposal price tag of RM2.89/share. We believe this is mainly due to the recent removal of the stock’s shariah compliant status. Hence, we view this as opportunity for investors to accumulate the stock as PUNCAK’s fundamentals remain intact and most importantly, investors could enjoy huge yield of 40% as a result of the special dividend of RM1.00/fd share to the shareholders pursuant to the group’s water assets sale.

Risks to our recommendation includes: (i) further delay in water restructuring exercise, (ii) absence of special dividends, and (iii) downward revision in the takeover valuation of the water assets.

Source: Kenanga