The Menteri Besar of Selangor Dato' Mohamed Azmin Ali confirmed in a media  interview  that  the  water  agreement  between  the  Selangor  stateand the federal governments lapsed yesterday and will not be extended.This is a major negative surprise that prompts us to downgrade our call to NEUTRAL, as we cut our SOP-based TP  to MYR2.61 (from MYR4.01, 3% downside) after pegging a 35% discount to our valuation.

Salient  details.  The  master  agreement  for  the  proposed  water restructuring  exercise  was  first  signed  in  Sep  2014  by  Tan  Sri  Abdul Khalid Ibrahim, the Menteri Besar (chief minister) of Selangor  back then. Under  the  initial  agreement,  the  federal  Government  was  given  three months to fulfil the pre-conditions. Nonetheless, the  federal Governmentthen sought two extensions, with the latest expiring  yesterday. With the confirmation by Dato’ Azmin  that the agreement has officially lapsed, we expect  the  proposed  acquisition  of  Puncak’s  100%  interest  in  Puncak Niaga  SB  and  70%  interest  in  Syarikat  Bekalan  Air  Selangor  to  be shelved  for  the  time  being,  until  the  Selangor  state  and  the  federal governments sort out their differences.

What is causing the delay?  Minister of Energy, Green Technology and Water Datuk Seri Dr Maximus Ongkili  was previously quoted  as  saying that the prolonged negotiations  were  mainly attributed to the ownership of  the  Semenyih  and  Bukit  Nanas  water  dams.  Based  on  our understanding, the disagreement arose as  these two  dams are  currently owned by the  Selangor State  Government  while the lands  these assets are currently sitting on belong to the Federal Government  (vis-à-vis  the remaining dams are all sitting on state-owned land). In addition, the local media also reported that the ownership of a large network of  water pipes in the state  is  currently in dispute,  too,  as these  pipes were  laid  in  both federal and state-owned lands.

Downgrade to NEUTRAL. This latest twist of events is a major negative surprise  to  us.  We  are  disappointed  that,  after  seven  years  of negotiations,  things  could  go  back  to  square  one  should  the  Federal Government  and  the  Selangor  State  Government  fail  to  reach  an amicable solution. As such, we downgrade our call to NEUTRAL with our SOP-based TP revised to MYR2.61 as we now  peg  a 35% discount to our valuation to reflect the increasing likelihood that there will be further delays on the negotiations. 

Source: RHB