1Q15 core earnings of MYR65.8m came in above expectations on a better-than-expected showing from its water treatment division. That said, we maintain our NEUTRAL call with our TP unchanged at MYR2.61 (+3% upside) as we reiterate our cautious stance on potential further delays in the proposed disposal of its water assets and operations.

Results review. 1Q15 revenue more than quintupled YoY to MR63.5m due to a low base effect in 1Q14 following Petronas’ decision to defer most of its oil & gas works to Apr 2014. By the same token, headline net losses narrowed by 96.0% YoY to MYR1.1m. All in, core earnings of MYR65.8m (derived by adding back the profit under its water treatment division, which management now classifies under “discontinued operations”, given that the proposed disposal of its water assets and operations have yet to be completed) came in at 24.9%/26.3% at our/consensus full-year estimates. We deem this above expectations given that 1Q is seasonally its weakest quarter. We attribute the outperformance to better-than-expected earnings accretion from its water treatment operations. On a sequential basis, numbers are generally weaker QoQ due to seasonality.

Forecasts and risks. We strip off Puncak’s water unit from our FY15F-17F headline numbers to be in line with its latest accounting practice. Our recurring net profit estimates of MYR307-351m (up from MYR264-285m previously, factoring in a lower effective tax rate as well as higher profit margins under its water treatment segment), however, continues to capture contributions from the division until the disposal exercise is official. Key risks include further delays to the ongoing negotiations and potential loss of income upon completion of the exercise.

Maintain NEUTRAL. All in, we maintain our NEUTRAL stance with our SOP-based TP still at MYR2.61, pegged to an unchanged 35% discount. Even after seven years of protracted negotiations, we caution investors that further delays are likely unless the Federal and the Selangor State Governments manage to sort out their differences regarding the land ownership of the Semenyih and Bukit Nanas water dams, as well as the ownership of water distribution pipes encroaching on both federal and state-owned lands.

SWOT Analysis

Company Profile

Puncak Niaga operates water treatment facilities, as well as supplies and distributes treated water in the Klang Valley via 70%-owned Syarikat Bekalan Air Selangor SB (Syabas).

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Source: RHB Research - 22 May 2015