Water Sector - Take your pick: membrane filters or Langat 2? NEUTRAL

- The local press has revealed that the Selangor government plans to introduce a new scheme to tackle any threats of a shortage in water supply within the state.

- This method would involve taking water from several water treatment plants (WTPs) and treating it separately to produce ~1bil litres of water daily. This compares with undertaking the treatment process at a single plant, which is what that has been outlined under the Langat 2 water supply scheme.

- Earlier, the state government had also proposed to spend RM1bil to boost the capacity of its WTPs by 50% via the introduction of containerised treatment technology.

- More importantly, Selangor Mentri Besar Tan Sri Khalid Ibrahim estimates the cost of the membrane system at fetch between RM500mil and RM700mil as opposed to ~RM3bil-RM5bil for Langat 2. This indirectly negates the need to raise additional water tariffs stemming from the latter.

- In response, the federal government – upon seeking  expert views – values the cost of installation of the membrane filters at all the 34 WTPs in Selangor to be much higher at RM3bil. More importantly, it holds the view that this method does not actually add more water to Selangor’s water supply reserves.

- Instead, the federal government remains adamant in pushing ahead with the construction of Langat 2.  To be sure, Deputy Prime Minister Tan Sri Muhyiddin Yassin had recently said that it is still awaiting the Attorney-General’s advice on whether to proceed with Langat 2 prior to receiving state approval as per the National Land Code or the Land Acquisition Act.

- We understand that some 20 companies have submitted bids for the Langat 2 project that the federal government hopes can be awarded by next June, ahead of its targeted completion by 2016/2017 (two years behind the original schedule).

- While question marks on Langat 2 remain, we note that expectations of a fresh takeover by the Selangor government have since quietened. This follows news reports late last month that indicated that the Selangor government would only make a new offer once the state executive council resolves certain issues on the water impasse via a dialogue with Muhyiddin.

- This latest development re-affirms our earlier reservations on whether the many longstanding issues surrounding Selangor’s fragmented water industry can be resolved before the impending general election.

- As such, our NEUTRAL weighting on the water sector remains, along with the HOLD calls on both Puncak Niaga Holdings and Kumpulan Perangsang Selangor (KPS).   

Source: AmeSecurities