Period

1Q15

Actual vs. Expectations

Within expectations. 1Q15 core net profit (CNP) of RM65.8m accounts for 22.1% and 26.2% of our and street’s full-year estimates, respectively.

Dividends

None as expected.

Key Results Highlights

QoQ, 1Q15 net profit declined by 19.4% due to losses in O&G division. We noticed that the division’s revenue could not cover its operating and rental expenses. This could mean that its current orderbook is not sufficient to maintain their overheads. On a positive note, construction division’s EBIT rose 14.3% to RM4.7m, thanks to strong orderbook progress.

YoY, 1Q15 net profit rose by 41.6% mainly attributable to: (i) construction division returning to profitability, and (ii) reduced losses in O&G division.

Outlook

Completion of asset disposal could be finalized soon. We gather that both the federal and state governments have agreed to resolve the Selangor water impasse within two months’ time. The news came out after both the Selangor Chief Minister Azmin Ali and Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili met recently to discuss the long-drawn water saga. If the above-mentioned discussion materialized, PUNCAK’s water assets disposal will be completed in the near-term.

Waiting for special dividend. The group has decided that 34% of the disposal proceeds (RM534.3m or RM1.00 per FD shares) will be distributed to shareholders. This implies 39% dividend yield based on the current share price.

What’s next? As the Selangor water assets contribute almost all of the group’s earnings, there will be a very huge earnings vacuum for PUNCAK. The group has yet to identify any future investment to fill the earnings 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.

Change to Forecasts

Unchanged

Rating

Maintain OUTPERFORM

Valuation

Maintain our SoP-based TP of RM3.99, implying a fwd PER of 5.5x (which is a premium to its 3-year fwd-PER average of 3.9x).

Nonetheless, after the special dividend payout, 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. We will look to revamp our FY15E earnings pending the conclusion of the deal.

Risks to Our Call

Disappointment in O&G earnings

Prolonged water consolidation issues

Absence of special dividend

Source: Kenanga Research - 22 May 2015