The Federal and Selangor State Governments signed a supplementary agreement on the proposed consolidation of the state’s water industry last Friday. This, in our view, helps to overcome the final hurdle for Puncak to dispose of its water-related assets and operations. Upgrade to BUY with a higher TP of MYR3.80 (37% upside).

Salient details. The supplementary agreement was to complement the water restructuring master agreement signed initially on 12 Sep 2014. Official details are scant at this juncture. KiniBiz, however, reported that this new agreement essentially allows the proposed consolidation to be implemented without the Selangor State Government (SSG) giving up its land , while complying with the requirements of the Water Services Industry Act 2006. We believe this ultimately implies that the SSG will claim ownership of the land assets, on which the Semenyih and Bukit Nanas water treatment plants are currently situated.

Final hurdle sorted out. We are glad to finally see light at the end of the tunnel after eight years of protracted negotiations. With the duos having sorted out all their differences, we believe Puncak Niaga’s (Puncak)proposed disposal of its water-related assets and operations will be finalised in due course. According to the supplementary agreement, the exercise will have to be completed within the next 60 days.

Other implications. On a side note, our channel checks indicate that the Federal Government and the SSG could soon revive the shelved takeover of Syarikat Pengeluar Air Selangor (SPLASH) to complete the state’s water sector restructuring. We believe this could imply an improved offer for SPLASH’s existing shareholders Gamuda (GAM MK, NEUTRAL, TP: MYR5.35) and Kumpulan Perangsang Selangor (KUPS MK, NR), which hold a 40% and 30% stake respectively in the unit.

Earnings revision. In view of the continued weakness in global crude oil prices, we take the opportunity to slash our FY15F-17F EPS by 24-40% by factoring in lower contribution from its MYR1.8bn Package B Pan Malaysia integrated offshore installation contract.

Upgrade to BUY. All in, we are hopeful that the Federal Government and the SSG will expedite the takeover exercise to finally put an end to Puncak’s monetisation of its water assets and operations. As such, we upgrade our call to BUY (from Neutral), and lift our TP to MYR3.80 (from MYR2.61) despite our earnings revision, as we remove the 35% discount previously pegged to Puncak’s SOP valuation.