Water Sector - Selangor table fresh RM9.7bil bid for water assets NEUTRAL

- The Star announced that the Selangor government has just tabled a fresh offer of RM9.7bil to take over all four private water entities in the state.

- Through state-owned Kumpulan Darul Ehsan Bhd (KDEB), the offer letters have been dispatched to Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS), Puncak Niaga Sdn Bhd (PNSB), Syarikat Pengeluar Air Selangor Holdings Bhd (SPLASH) and Konsortium Abass Sdn Bhd.

- The Selangor government further explained that the latest offer implies an annual return on equity of 12%. 

- KDEB will form an SPV to manage the take-over and also assume the liabilities of the private water entities. The entities would have two weeks to respond.

- This is the third such known attempt by the Selangor government to consolidate water assets within the state under one roof.

- The first offer of RM5.7bil was rejected by the four entities back in February 2009. Then in June the same year, the state government made a second offer of RM9.2bil, but this was rejected by both of Puncak’s units, i.e. PNSB and SYABAS. A third offer subsequently ensued, which we estimate was close to RM9bil in January 2011. But, that too lapsed with no takers.

- In between, SPLASH itself had in March/April 2010 made a RM10.8bil offer but no consensus was reached among all parties concerned. By our calculations, this translated into an implied value of around RM4.50/share for Puncak.

- While details remain sketchy at this juncture, we note that the total offer of RM9.7bil by the Selangor government under this fresh exercise is still lower than the RM10.8bil that SPLASH tabled.

- Secondly, even if a middle ground is reached with all parties on the valuation, we are unsure if a deal can be reached with the general election looming in the corner. This comes amid a fresh federal allocation of RM120mil being dished out to SYABAS to upgrade water facilities – bringing the total amount of federal aid to ~RM606mil.

- Throw in the fact that the structure of water assets in Selangor remains largely fractured; characterised by multiple ownerships across individuals, and the federal and Selangor governments.

- Pending more details on the breakdown of this fourth and latest offer by the Selangor government, we maintain our NEUTRAL weighing on the sector. 

- As such, Puncak also remains a HOLD with an unchanged fair value of RM1.55/share. This is pegged to a 70% discount to its break-up value of RM5.17/share, of which its water units account for 78% or RM4.06/share. Until more clarity emerges on the political scene after the elections, the stock would likely continue to trade at a steep discount to its break-up value.  

Source: AmeSecurities