Stock Name: PUNCAK
Company Name: PUNCAK NIAGA HOLDINGS BHD
Research House: TA
Puncak Niaga Holdings Bhd
(March 22, RM2.50)
Maintain hold at RM2.43, target price of RM3: We continue to believe assets monetisation is the ideal exit point for shareholders, given the attractive potential upside - RM5.40 discounted cash flow valuation for Puncak Niaga and its 70%-subsidiary Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) versus the current market price of RM2.43. Uncertainty over the timing of the conclusion in negotiations however remains a key concern at this juncture. Hence, although potential upside to the stock price is now higher than 15% which warrants a buy, we retain our hold recommendation until we can get a clearer picture on the timeline on completion of the assets takeover exercise.
Water assets takeover talks between the state government and federal government presumably via Ministry of Finance-controlled Pengurusan Aset Air Bhd (PAAB) is still in the negotiation stage. We understand that the federal government is taking a more holistic approach in the restructuring of the Selangor state water assets by also addressing other outstanding issues, particularly the interstate water transfer project. This may be one of the causes the talks missed a few deadlines set by the ministry.
However, on a positive note, PAAB has completed the due diligence exercise on Puncak, leaving only the pricing issue outstanding. Our channel check indicates key stakeholders are targeting to complete the takeover talks by mid-2010, although we would not discount the possibility of negotiation dragging into 3Q10 given the complexity of the issues involved.
The management confirmed that Syabas has issued a letter of demand to the state government in respect of the tariff compensation in 2009. However, so far, we understand that the state government has yet to make any formal response. At this juncture, the management indicated that they prefer to wait for a reply before beginning to contemplate the next move, which naturally means proceeding to file a legal suit in court. We feel that the broader issue of a tariff hike would likely remain status quo until the water assets takeover talks are concluded, and based on the state's government public statements so far, nor could Syabas expect any compensation arising from the delay in tariff adjustment.
Without a tariff hike or conclusion to the assets takeover talks, Syabas is likely to sink further into the red. According to the management, Syabas loses about 10 sen to 20 sen per cu m water sold. Capital expenditure spending has been put on hold, except for emergency cases and must receive prior approval from SPAN (National Water Services Commission) and the state government. Cash flow management too is being prioritised with critical items such as financing cost and salaries taking precedents. - TA Securities, March 22
This article appeared in The Edge Financial Daily, March 23, 2010.
Company Name: PUNCAK NIAGA HOLDINGS BHD
Research House: TA
Puncak Niaga Holdings Bhd
(March 22, RM2.50)
Maintain hold at RM2.43, target price of RM3: We continue to believe assets monetisation is the ideal exit point for shareholders, given the attractive potential upside - RM5.40 discounted cash flow valuation for Puncak Niaga and its 70%-subsidiary Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) versus the current market price of RM2.43. Uncertainty over the timing of the conclusion in negotiations however remains a key concern at this juncture. Hence, although potential upside to the stock price is now higher than 15% which warrants a buy, we retain our hold recommendation until we can get a clearer picture on the timeline on completion of the assets takeover exercise.
Water assets takeover talks between the state government and federal government presumably via Ministry of Finance-controlled Pengurusan Aset Air Bhd (PAAB) is still in the negotiation stage. We understand that the federal government is taking a more holistic approach in the restructuring of the Selangor state water assets by also addressing other outstanding issues, particularly the interstate water transfer project. This may be one of the causes the talks missed a few deadlines set by the ministry.
However, on a positive note, PAAB has completed the due diligence exercise on Puncak, leaving only the pricing issue outstanding. Our channel check indicates key stakeholders are targeting to complete the takeover talks by mid-2010, although we would not discount the possibility of negotiation dragging into 3Q10 given the complexity of the issues involved.
The management confirmed that Syabas has issued a letter of demand to the state government in respect of the tariff compensation in 2009. However, so far, we understand that the state government has yet to make any formal response. At this juncture, the management indicated that they prefer to wait for a reply before beginning to contemplate the next move, which naturally means proceeding to file a legal suit in court. We feel that the broader issue of a tariff hike would likely remain status quo until the water assets takeover talks are concluded, and based on the state's government public statements so far, nor could Syabas expect any compensation arising from the delay in tariff adjustment.
Without a tariff hike or conclusion to the assets takeover talks, Syabas is likely to sink further into the red. According to the management, Syabas loses about 10 sen to 20 sen per cu m water sold. Capital expenditure spending has been put on hold, except for emergency cases and must receive prior approval from SPAN (National Water Services Commission) and the state government. Cash flow management too is being prioritised with critical items such as financing cost and salaries taking precedents. - TA Securities, March 22
This article appeared in The Edge Financial Daily, March 23, 2010.
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