The Government is invoking Section 114 of WASIA to assume control of water operations in Selangor  with the  official  commencement date yet to be firmed up. Nonetheless, it looks increasingly likely that  the state’s water  saga  will  be  further  prolonged  should  the  existing  water concessionaires resort to legal recourse.  We downgrade Puncak  Niaga (Puncak) to NEUTRAL with a revised MYR3.13 FV (from MYR5.22).

• WASIA  invoked.  The  Energy,  Green  Technology  and  Water  Minister Datuk  Seri  Dr  Maximus  Ongkili  said  that  the  Government  is  invoking Section  114  of  the    Water  Services  Industry  Act  2006  (WASIA)  to assume  control  of  water  operations  in  Selangor  on  national  interest grounds.  The  commencement  date  of  the  invocation  has  yet  to  be decided, with said invocation conditional upon  the Federal and Selangor State  Governments signing the heads of agreement  with regards to  the: i)  proposed  water  industry  restructuring,  ii)  financial  facilitation,  and  iii) proposed Langat 2  water treatment plant  project, as  stipulated in the  26 Feb memorandum of understanding signed by both parties.
• Another  twist  yet  again.  This  development  comes  as  a  negative surprise to us,  as we had earlier expected the proposed consolidation to be  implemented  on  a  “willing-buyer  willing-seller”  basis.  Under  such invocation,  the existing concessionaires are expected to carry out their respective  operations  as  usual  and  will  be  rewarded  based  on  key performance  indicators  (KPIs)  like  water  production  targets,  quality control,  maintenance and overall management.  Nonetheless, the water players  will  be  required  to  report  to  Government-appointed administrators and task force teams.  
• Downgrade  to  NEUTRAL.  All  in,  we  are  disappointed  that,  with  this invocation,  it  looks  increasingly  unlikely  for  Puncak   to  monetise  on  its existing  water  treatment  and  distribution  assets.  Instead,  management will likely have to focus on improving its operations to achieve the KPIs in order to be rewarded accordingly. Moreover, we believe the state’s water saga  could  be  further  prolonged  should  the  existing  water concessionaires resort to legal recourse.  Hence, we are now pegging a 40% discount to our SOP valuation with our FV now stands at MYR3.13. With that, we are downgrading our call to NEUTRAL.

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Source: RHB