News flow on the sector has risen up lately and we expect
this trend to continue closer to the upcoming general election. There are 2 key developments in the sector i.e. (1)
MMC’s JV proposal with PAAB to own national water assets and (2) Selangor State
Government’s (SSG) proposal to take over
the Selangor water assets by August 2012. Although our recommendation is to remain Neutral on the sector, we are
opting for a trading stance in the short term due to the rising news flow. A
slightly positive news is that the Special
Cabinet Committee (SCC) has decided to tender the Langat 2 contract in a
month’s time and this could be the sign of more “water talks” in the near term.
We are maintaining our OUTPERFORM recommendation for PUNCAK with an unchanged
Target Price of RM3.01 based on SoP valuation. We value its water business at
RM2.61 per share and its oil and gas business at RM0.40 per share. We believe
Puncak will be a good stock to trade on in the near term riding on the takeover
news above. For MMC, we are also maintaining our OUTPERFORM recommendation with
an unchanged Target Price of RM3.11 based on SoP valuation although we are
neutral on its proposed JV partnership with PAAB at this juncture.
Water sector gaining
traction. Based on the last two
significant news i.e. (1) MMC’s JV proposal with PAAB to own national water
assets and (2) SSG’s proposal to take over Selangor water assets by August
2012, we believe that there will be more news flows coming out in the near term
as the time is approaching closer to the election period. Despite so, we are
keeping our neutral stance at this juncture until we see further material news
and announcements from the SSG, federal government or the concessionaires. In
our view, the Selangor water consolidation issue will only be concluded after
the upcoming election, where thereafter, we are expecting a better offer for
Puncak.
Slightly positive
news. The SCC has decided that the Langat 2 project will be tendered out in
a month’s time. The Langat 2 project is part of the Pahang Selangor Water
Transfer (PSWT) project, where the scope will be the construction of water
treatment plants (WTP) at Hulu Langat, Selangor. Based on various news reports,
the cost of the PSWT project is expected to range around RM8b to RM9b. Thus
far, only RM1.3b worth of contract has been awarded under PSWT, with the Langat
2 project expected to offer another RM3b to RM4b worth of contracts once it is
tendered out. This is definitely positive news for the water sector, especially
for the contractors and pipe makers like JAKS, Puncak, Salcon, Gamuda and Taliworks
as they have the experience in the construction of water treatment plants (SSP1
& SSP3) and pipe laying works.
Bargaining power
still in Puncak’s hand. We are
keeping our view that Puncak still has the bargaining power to negotiate for a
better pricing for the sale of its water assets to SSG and the federal
government. This is because its existing Concession Agreement (CA) is signed between
the state and the federal government. We do not expect a cheap way out for
Puncak as the water business remains as its core business. Its oil and gas
business, however, is slowly bearing fruit and we expect this division to secure
more contracts in FY12.
What investors should
do? We believe investors should consider to take a trading position on
water related counter like Puncak, Taliworks, Gamuda and JAKS as more positive
news flows come out in the near term, especially in relation to the Langat 2
project contracts. All told, we are
maintaining our NEUTRAL recommendation on the sector but are opting for a
Trading stance for the short term. Our Top Pick for the sector is Puncak (OP,
TP: RM3.01) from a takeover angle and it being the beneficiary of the Langat 2 project. As for the construction sector, we are
maintaining our OVERWEIGHT rating. We see Gamuda (OP, TP: RM4.64), IJM Corp
(MP, TP: RM5.56) and WCT (OP, TP: RM3.92) as being the main beneficiaries of the
Langat 2 project.
Source: Kenanga
No comments:
Post a Comment