News  Yesterday, Puncak Niaga Holdings Bhd (Puncak) announced that it received two hand-delivered offer letters from Selangor State Government’s arm, Kelab Darul Ehsan Bhd (KDEB), for another attempt to take over its Selangor’s water assets, the 70%-owned SYABAS and wholly owned PNSB.

 As expected, the RM5.6b price tag for both assets remained the same as per the previous and fourth offer in February 2013. Out of RM5.60b, RM1.56b is the equity value and the remaining RM4.04b is the “assets to be acquired” by PAAB.

 Puncak will review the offers before reverting to KDEB before the deadline of 4th December 2013.

Comments Although it is not a surprise, we are POSITIVE on this announcement as the offer is clearer than the previous KDEB’s offer. KDEB has clearly stated that the amount of the “water assets to be acquired by PAAB” which is equivalent to all liabilities in PNSB and SYABAS level to be assumed is worth RM4.04b. It also stated that the offer value may be revised following a due diligence inquiry.

 PAAB and KDEB are in discussion. To recap, one of the major reasons that the last offer had not gone through because PAAB was neither aware nor involved in the takeover offer tabled by KDEB. Nevertheless, as of now, we understand KDEB is currently in active discussion with PAAB to reach a workable solution for smooth takeover process. Hence, we believe that PAAB is now fully aware on this KDEB’s particular offer.

 Equity value translates into RM2.89/share (fully diluted basis). Assuming the RM4.04b “asset to be acquired by PAAB” is all the liabilities to be assumed (i.e. set to be known after the due diligence), Puncak is expected to pocket total cash of RM2.89/share if it accepts this offer.

Outlook  Remain Positive. Puncak is riding on both the M&A and O&G wave. Investors are expected to receive special dividend post-water-takeover exercise. Meanwhile, on its O&G division, Puncak is currently pursuing big Petronas jobs and is likely to clinch one or two jobs worth more than RM500m in the near-term.

Forecast  Unchanged.

Rating Maintain OUTPERFORM We reiterate our OUTPERFORM rating on Puncak as it will be the prime beneficiary for the Selangor water consolidation. We are also upbeat on its O&G division which is actively pursuing Petronas’ jobs.

Valuation  We maintain our Target Price of RM4.05, based on SOP-derived valuation (i.e. SSG’s equity value for its Selangor water asset and PER of 10x for its O&G FY14E earnings).

Risks to Our Call Prolonged water consolidation issues.

 Absence of special dividend

 Absence of O&G jobs or lower-than-expected new contracts secured.

Source: Kenanga