We  reaffirm  our  cautious  stance  on  the  proposed  consolidation  of Selangor’s  water  industry,  as  we  do  not  discount  the  possibility  of further delays to the 31 Dec deadline set by both the  State and  Federal Governments  to  resolve  the  existing  deadlock.  Following  Puncak Niaga’s  recent share price appreciation, we are  downgrading  our call to SELL (from Neutral), with our FV unchanged at MYR2.51.

- Ongoing  talks  to  conclude  by  31  Dec.  Negotiations  between  the Selangor and Federal Governments on the proposed consolidation of the State’s  water  industry  are  currently  ongoing.  Both  parties  have  set  31 Dec as the target date to come  out with an amicable solution to resolve the existing deadlock. 

- Pricing the key hurdle. We are, however, less optimistic and opine that the  long-awaited  consolidation  of  Selangor’s  water  industry  could  be dragged further on into 2014. We believe the main hurdle is the pricing of the  water  assets.  We  note  that  Kumpulan  Darul  Ehsan  recently mentioned that  any new attempts to take  over the assets  will  likely be priced the same as its previous fourth offer.

- Operating  structure  has  yet  to  be  sorted.  We  understand  that  the operating structure post  proposed  consolidation has  yet to be finalised. We gather that  the  State  Government has proposed for both the water assets  and  asset  managers  to  be  parked  under  a  special  purpose vehicle  (SPV)  that  it  will  own.  This,  however,  contradicts  the  Water Services  Industry  Act  2006  (WASIA),  which  requires  the  Federal Government to be the asset owner via Pengurusan Aset Air Bhd (PAAB)while the State Government strictly plays the role of asset operator.

- Political interests at stake.  We believe political interests could also be one of the major hurdles  for  the two  parties involved. Note that  Menteri Besar Tan Sri Khalid Ibrahim recently announced that Selangor’s first 20 cu m free water programme  will  continue for “another decade”  upon the restructuring of  Selangor’s water industry. This,  however, may  not bode well for the Barisan Nasional  (BN)  coalition  that  only managed to win 12 out of 56 seats contested  within Selangor  at  the recently concluded  13th
General Election (GE13).

Source: RHB