Water Boys Have Upper Hand

The offers by the Selangor State government has been deemed as inadequate by most water asset players. Even if the state government were to up its offer, there is still the niggling doubt as to the ability of Selangor state government, via Kumpulan Darul Ehsan Bhd (KDEB), to secure funding for the exercise. As such, the offers are likely to be noncash or substantially non-cash.

As the offers did not assume the liabilities, the final offers are actually quite low. However, this should be perceived as the first of many to-and-fro to arrive at an acceptable figure. That is why the initial reply is expected from the players by 20 Feb. The acquisition deadline is end-March 2009. Looking at the funding ability of the state government, it is very likely that the state will absorb most or all of the liabilities in order to push the deal through.

The state government has to try to push for the deal as Puncak is slated to raise water tariff by 37% come April 2009. Water plays not dead, investors should not look at absolute values of the initial offer. Its a negotiation ploy. Recommendations and target levels still maintained as before. Even in the event that the state government fails to reach a solution with the players, the situation could be remedied by possibly Pengurusan Air Asset Bhd (PAAB) being asked to take over the Selangor operations. Currently PAAB and SPAN (authority for water supply development) are in discussions to takeover the water supply operations of Johor (under SAJ Holdings). It is expected to be completed by end of February 2009.

Hence if one is willing to hold out for a 3-6 months view, most of the water asset plays should bring about decent returns. The final acceptable offer has to see most or all of their liabilities being absorbed by the buyer, because none of them will accept otherwise as that would leave them possibly in deficit after paying off the debts.

p/s photos: Charlie Yeung

Its Raining Men, Water Boys

Coincidence or not, the rally in water related stocks kind of woke up the bull. Asian bourses have been dying to move higher since the beginning of the year. Now that the US fiscal stimulus plan is out of the way, most Asian bourses seem to finally manage to wrest itself from the bear clutches. I do think its a rally, I also think this is a bear market rally and will not be a prolonged one. I think this rally could allow the KLCI to go to 960-970 and consolidate around there.

The water agreement has to be agreed and implemented before 31 March 2009 as that was ordered by the Ministry of Water, Energy and Communications. This move was designed to prevent a tariff hike, and also to prevent a takeover of water assets by the federal government. Hence the Selangor state government's strategy for the offer.

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TheEdgeDaily: The Selangor State Government has made a RM3.1 billion offer to acquire the assets of two water concessionaires from Puncak Niaga Holdings Bhd.

Puncak Niaga said it had received letters of offer from Selangor to acquire its unit, Puncak Niaga Sdn Bhd (PNSB) for RM1.61 billion and Puncak Niaga's 70%-owned Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) for RM1.51b.

“Both PNSB and Syabas are given until Feb 20 to revert to the Selangor state government on the respective offers before negotiations commence towards a mutual agreement on the terms of the offer,” Puncak Niaga said.

It added the board and management of PNSB and Syabas would review the offer from the Selangor state government. On the offer for PNSB, the valuation date was Dec 31, 2007 while the asset value was RM1.14 billion and equity value RM543.05 million. After the deduction of the dividends, the offer price was RM1.61 billion. “The offer price to PNSB is based on the cash value and payment to be made by taking over of all water assets and operations of PNSB without any liabilities to be assumed by the Selangor government,” it said.

On the offer to Syabas, the offer price was RM1.51 billion based on the valuation of the water assets of Syabas as at Dec 31, 2007. The asset value is RM1.09 billion and equity value RM424 million.

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The amount proposed by the state government was close to most analysts' estimates. Puncak is the market leader. Its book value is RM3.30 and the developments will definitely cause the stock to see RM3.30 as a solid bottom for the stock. DCF valuations for Puncak is between RM4.80-5.50, and some discount on that should still see the stock try to reach the RM3.90 level.

Gamuda also rose, not on the developments in Perak politics, as many are assuming, but rather on its stakes in Gamuda Water and Splash. Gamuda will roughly get almost 50 sen per share which could be distributed out as dividend. Gamuda could go back to RM2.30 and consolidate around those levels till the dividend is announced, a RM2.10 bottom should be established for bottom fishers willing to buy and wait for the dividend.

The interesting candidate which seems to have dropped from most radar is IJM as it will be getting ath RM3.8bn water tunnel project. IJM should have no problem scaling above RM4.00 with RM4.26 as the first target level.

KPS and Jaks will benefit from the RM5bn Langat2 water treatment plant. However both are pure trading plays as their longer term business strategy is still predicated on developments of the bigger picture.

p/s photos: Meisa Kuroki