We maintain our TRADING BUY call and fully-diluted SOP-based TP of MYR4.01 (+21.1% upside) on Puncak Niaga (Puncak), whose 9M14 net profit of MYR166.7m came in above our expectations. This was due to lower-than-expected tax rate incurred in 3Q14. 9M14 PBT of MYR200.2m was largely in line at 72.5% of our full-year estimate. 

Results review. 9M14 revenue shed 7.0% YoY to MYR792.2m, dragged down by lower contribution from both its water treatment (-3.2% YoY) and oil and gas (O&G) divisions (-14.6% YoY). PBT sank by a larger 17.0% YoY to MYR200.2m, due to lower profitability margin from its water treatment operations on higher opex incurred. All in, 9M14 core earnings of MYR166.7m (-6.3% YoY) came within consensus but above our expectations at 73.2% and 79.4% of the respective full-year forecasts due to lower-than-expected effective tax rate of 9.3% in 3Q14.3QFY14 numbers were generally higher on both YoY and QoQ basis on improved showing from its O&G arm following the resumption of its contract works with Petronas since 2Q14.

Water sale by 3Q15. On 13 Nov, Puncak agreed to sell its 100% stake in Puncak Niaga SB and 70% stake in Syarikat Bekalan Air Selangor SB to Kumpulan Darul Ehsan for a total consideration of MYR1.56bn. We expect an EGM to be called for by early-1Q15. We continue to advise investors to vote for the exercise to put an end to the much-delayed saga after six years of negotiations. We believe the exercise will be completed by 3Q15.

Forecasts and risks. We upgrade our FY14F EPS by 5.3% by lowering our effective tax rate. We leave our FY15-16F forecasts unchanged for now. Our estimates are at 30.9-38.9% discounts to consensus due to our more conservative approach with respect to earnings accretion from its O&G arm, as we do not discount the possibility of a further deferment of its MYR1.8bn Pan Malaysia integrated offshore installation contract, which was awarded by Petronas back in Dec 2013.

Maintain TRADING BUY. We maintain our TRADING BUY call with our fully-diluted SOP-based TP unchanged at MYR4.01. Management has committed to distributing a special DPS of at least MYR1.00 upon the completion of its water assets and operations disposal. This in our view would help to support its share price over the near term.

Source: RHB