The  Edge  Financial  Daily  reported  that  the  Federal  Government  is invoking  Section  114  of  WASIA  on  Selangor’s  water  concessionaires.While this may appear negative at first glance, we expect  Puncak  to be compensated by  a  MYR1.56bn  cash infusion, ie  the last offer tabled by the Selangor  State  Government  (SSG).  This is in line with our previous guidance. Thus, we maintain our BUY call and MYR5.22 FV.

• Salient details. According to Section 114 of Water Services Industry Act 2006 (WASIA), 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 will  likely result in a hostile takeover of all existing water-related assets, as well as operations.
• Blessing in disguise?  While this may appear negative at first glance, we  believe  that  all  the  water  concessionaires  involved  will  likely  be compensated  in  the  form  of  physical  cash  payments.  We  expect  the quantum of these compensations to be in line with the SSG’s latest offer. In Puncak  Niaga (Puncak)’s  case,  for instance,  we expect  the group  to be  compensated  by  a  potential  cash  infusion  of  MYR1.56bn,  ie  the combined equity value of its 100%-owned  Puncak Niaga SB as well as 70%-owned  Syarikat Bekalan Air Selangor SB  as tabled by the SSG in its latest offer.  This could potentially translate into a hefty cash infusion of MYR3.78 per share based on its existing 411.0m  outstanding share base.
• Maintain  BUY.  All  in,  while  we  are  slightly  surprised  by  the  Federal Government’s  decision  to  take  over  the  water  concessionaires  by invoking  Section  114  on  a  willing-buyer  willing-seller  basis,  we  believe this could come as a blessing in disguise for Puncak. This is given that: i) the  previous  MYR1.56bn  valuation  for  its  water  operations  is  deemed reasonable  and  is  at  an  over  17%  premium  to  its  current  market capitalisation,  and  ii)  the  triggering  of  the  takeover  clause  could accelerate  the  entire  consolidation  exercise,  as  the  other  water concessionaires had  previously rejected the SSG’s last offer. Hence, we are  maintaining  our  BUY  call  at  this  juncture,  with  our  SOP-based  FV unchanged at MYR5.22. 

Recommendation Chart

Source: RHB