Company Name: KUMPULAN PERANGSANG SELANGOR
Research House: AMMB
Maintain neutral: The Selangor government has made a new offer of RM9 billion to RM10 billion to acquire the water assets in the state, according to media reports. We gather that the new offers were dispatched to the private water entities within the state yesterday.
They are Puncak Niaga (M) Sdn Bhd, Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), Konsortium Abass Sdn Bhd (Abass) and Syarikat Pengeluar Air Selangor Sdn Bhd (Splash).
This is the third such official offer from the state government towards consolidating the state's fragmented water industry. The state intends to make a 100% offer for the ordinary shares of the four entities ' RM64.62 per share for PNSB, RM20.78 per share for Syabas, RM5.95 for Splash and RM9.39 for Abass.
The first offer ' made in February 2009 for the water assets and equities ' was turned down by all four private water entities. The second offer of RM9.2 billion made four months later ' then including the water liabilities ' was rejected by both PNSB and Syabas (units of Puncak Niaga Holdings Bhd). In March 2010, Splash instead made a bid totalling RM10.7 billion.
Benchmarking the higher end of the state government's latest new offer (RM10 billion) against previous offers, the valuations appear to be higher than the RM9.2 billion being dished out under the state's second offer but lower than Splash's RM10.7 billion.
We gather that under the deal, the state government intends to transfer the ownership of the water assets back to the federal-backed Pengurusan Asset Air Bhd (PAAB). Any dispute can subsequently be brought up to an international arbitration court.
But, we reiterate our view that any resolution to this deadlock remains somewhat uncertain for now. First, the actual pricing has yet to be ascertained at this juncture, including any extended offers for convertible securities.
Second, the issue of control over water distribution rights ' now under Syabas ' remains a niggling problem. The state government has made it abundantly clear that it intends to lead consolidation in a holistic manner ' treatment and distribution under one roof as per the new water framework.
After all, the state government still holds considerable bargaining clout through the ownership of'' approximately 80% of the state's water assets, including raw water. Via Kumpulan Perangsang Selangor Bhd (KPS), it also owns stakes in Splash (30%) and Abass (55%). It also has a 30% share of Syabas (including 15% indirectly via KPS).
Third, dark clouds still linger over Syabas' proposed tariff hike. Fourth, earlier reports point towards disagreements between the federal and Selangor governments on the valuations of the physical assets (pipes and water treatment plants, for example).
As such, we maintain our 'neutral' weighting on the water sector. In line with our sector call, we retain our 'hold' ratings on Puncak (fair value: RM2.93) and KPS (FV: RM1.61). ' AmResearch, Jan 7
This article appeared in The Edge Financial Daily, January 10, 2011.