Water Sector - Disconnect in calculation of water reserves NEUTRAL

 - Recent local press reports have reported that the federal government is putting a contingency plan in motion soon to deal with any potential shortages in water supply in the Klang Valley. The Star quoted Energy, Green Technology and Water Ministry Datuk Seri Peter Chin as indicating that the contingency plan would ensure the supply of treated water within the Klang Valley until the proposed Langat 2 water treatment plant (WTP) is completed.

- We are unsure about what the contingency plans would entail. However,  The Star  had reported back in March that the federal government was to implement three water mitigation projects to sustain supply until 2017 following delays in the construction of Langat 2. 

- Phase 1 would involve the upgrading of water intake at Sg.Selangor, replacement of old pipes to reduce non-revenue water (NRW) and upgrading of water pumping system at Bernam River. From this, at least 260-million litres of water per day (mld) of raw water can be put into the system. 

- Under phase two, another 250 mld of raw water can be put into the system by 2014 while efforts are also being made to transfer some raw water from Sungai Selangor through a new pipe line to the places mostly in need of supply.

- That said, there appears to be a disconnect in the calculation of the water reserve margins in Selangor. Selangor Mentri Besar Tan Sri Khalid Ibrahim revealed at a press conference that based on the findings of a state-led special water monitoring committee, the treated water reserves stands at 11% vs. 2% as claimed by Syarikat Bekalan Air Selangor (SYABAS). 

- Khalid explained that the difference could be due to the state’s policy of measuring the capacity at the WTP as opposed to the distribution system capacity as gauged by SYABAS. We understand that the production capacity of 34 WTPs at present stands at ~4,807 mld vs. SYABAS’ distribution capacity of 4,371mld. This implies an excess of 436MLD. 

- Via a mitigation project, the Selangor government expects production capacity reserves to be bumped up to 18% by March 2013 to 5,139 mld or 768 mld more than SYABAS’ distributive capacity.

- We had highlighted earlier this week that the Selangor government is reportedly looking at using its own money to upgrade the existing Sg.Selangor Phase 1 and 3 plants to boost water supply in the state – if its request for funds is turned down. It believes that both plants are operating below their maximum capacity due to a lack of sufficient lines to channel out the additional treated water. In addition, there are also plans to fork out an additional RM200mil to RM300mil to upgrade the technology to supply treated water.

- This comes amid the Selangor government’s intentions of taking control of SYABAS and the federal government’s plans to push through the construction of Langat 2. Until more clarity surfaces, we maintain our NEUTRAL rating on the water sector. With this, both Puncak Niaga Holdings and Kumpulan Perangsang Selangor (KPS) remain as HOLDs.  

Source: AmeSecurities