PNH announced on Bursa Malaysia that it has received notification from the Selangor State Government that there will be no further discussions in  the  foreseeable  future  on  the proposal  to  takeover its water assets and  operations.  While  this  latest  development  caught  us  by  surprise, we believe it is too early to draw any conclusions  pending confirmation on the offer details from the Federal Government. Maintain BUY for now with our MYR5.22 FV unchanged.

• Differences sorted out? The news comes after Selangor Menteri Besar Tan  Sri  Abdul  Khalid  Ibrahim  said  that  the  State  Government  had discussed the matter with Energy, Green Technology and Water Minister Datuk  Seri  Dr  Maximus  Ongkili  and  had  agreed  to  cooperate  with  the Federal Government to adopt Section 114 of the Water Services Industry Act  2006  (WSIA  2006)  –  subject  to  certain  conditions.  According  to Section  114,  the  Energy,  Green  Technology  and  Water  Minister  may assume control of all assets and operations of any water concessionaire ,and carry on the whole of its operations  on  “national interests” grounds.Ultimately, this clause could potentially result  in a hostile takeover of all existing water-related assets,  as well as operations,  should the  Federal Government decide to push through with the consolidation exercise.
• Meeting to be called for. Separately, The Star reported that the cabinet committee of  the proposed water industry consolidation in Selangor will meet  soon  to  finalise  the  technical  and  financial  mechanism  to  invoke Section  114.  Datuk  Seri  Dr  Maximus  was  quoted  as  saying  that  the takeover  process  will  be  completed  in  “the  shortest  time  possible”  in order to start work on the Langat 2 water treatment plant.
• Maintain  BUY.  While  this  latest statement  from  the  State  Government caught us by surprise, we believe it is too early to draw any conclusions pending  confirmation  of  the  details  of  the  offer  from  the  Federal Government.  Hence,  we  are  maintaining  our  BUY  call  at  this  juncture ,with  our  SOP-based  FV  unchanged  at  MYR5.22.  In  our  worst  case scenario assumption, we believe PNH’s net proceeds from the sale of its water  assets  and  operations  could  fetch  MYR1bn  (from  our  current MYR1.5bn  estimate).  This  could  potentially  lower  our  FV  to  MYR3.87, which still justifies a BUY.

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Source: RHB