PUNCAK (FV RM1.82 - TRADING BUY) FY11 Results Review: Breezing Through Choppy Waters

Stock Name: PUNCAK
Company Name: PUNCAK NIAGA HOLDINGS BHD

Research House: OSK

Price Call: TRADING BUY

Target Price: 1.82

Thanks to timely profit recognition at its constructiondivision, Puncak's core net profit of RM3.7m for FY11 beat our and street projections for a loss. Meanwhile, wereckon the scheduled 25% water tariff hike from 2012 may somewhat  help improve earnings, regardless of whetherofficial approval is granted. We are also upbeat on higher  revenue from its newly acquired Oil & Gas(O&G) unit and earnings from outstanding pipe laying projects. As the shareprice offers a decent upside to our FV of RM1.82,  we are prompted to upgrade Puncak back to a Trading BUY.

Marginally ahead ofexpectation.  Excluding thenon-operating income amounting to RM5.6m, Puncak reported a core net profit ofRM3.7m for FY11, which was ahead of our and consensus' projection of a loss.The revenue was 21.7% higher than our numbers, thanks mainly to higherconstruction revenue from  its  water pipe project and maiden contributionfrom  its newly acquired O&G subsidiary. However,  the group is allocating more capex and various annual charges directly to itsincome statement (P&L) to comply with accounting standard IC 12,  which continues to undermine Syarikat Bekalan Air Selangor SB  (Syabas)'s bottomline. That said,  the timely profit recognition  in its constructiondivision will help to cushion the negative impact.

25% tariff hike andO&G contribution? As provided under the concession agreement, 70%-ownedSyabas is scheduled to receive a 25% water tariff hike from 1 Jan 2012. We donot expect any hike to be implemented as the previously scheduled 30% hike for2009 is still under legal dispute with the Selangor State Government. However,we believe the group will again account for the estimated compensation for thenew water tariffs, which will artificially boost its bottomline. Meanwhile, wealso understand that its newly acquired Global Offshore (M) SB (GOM) hassecured a lucrative O&G pipe maintenance project worth some RM420m, whichwill keep the unit busy this year. This aside, Puncak is also bidding forvarious water projects, with margins for its water and O&G projects estimatedto be in the mid-teens.

Trading BUY. Weexpect Puncak's FY12 profit to hit RM172.4m, incorporating the tariff hikecompensation mentioned earlier, as well as contributions from its O&G andwater pipe-laying projects. Since our last downgrade on the stock, its shareprice accordingly fallen back. Against our original fair value of RM1.82, thestock now provides a decent potential upside of 31%. In light of these factors,we upgrade Puncak back to a Trading BUY. Our fair value is derived from 0.7xFY11 B/V, which was the benchmark used before adjustments for IC Interpretation12.

Source: OSK188