Stock Name: GAMUDACompany Name: GAMUDA BHDResearch House: CIMB
Water sector
Maintain trading buy, Gamuda remains outperform with target price raised to RM4.60: News reports over the weekend centred on Syarikat Pengeluar Air Selangor Holdings Bhd's (Splash) RM10.8 billion proposal to take over all four water concessionaires in Selangor and the implications on the ongoing national water industry restructuring by the federal government and the water industry consolidation initiative by the Selangor state government.
The highlights were Splash's takeover proposal that was motivated by the unofficial/verbal takeover offer by Pengurusan Aset Air Bhd (PAAB) on March 18, which was lower than the Selangor state government's last offer.
PAAB's offer for Splash was, at most, half of the RM1.4 billion equity value offered by the Selangor state government.
Another big difference, according to Gamuda Bhd group managing director Datuk Lin Yun Ling, was that PAAB does not want to maintain the operations and maintenance rates for Sg Harmoni.
Lin noted that the state government's offer was not coordinated with the federal government and believed that there would be no closure to the issue. Gamuda owns 40% stake in Splash. He said Splash's proposal addresses funding and pricing, the two main concerns that arose from the Selangor state government's unsuccessful takeover offers. Splash plans to raise its paid-up capital from RM400 million to RM2.4 billion via equity injection by its existing shareholders.
With the large capital, banks would be willing to lend about RM8 billion. The RM2.4 billion would be more than enough to cover the risk of losses or cost overruns. The lenders/banks would tie the borrowings to Splash's cash flow/revenue and not the assets.
Splash's proposal is not only about a better price tag but is also about adequate capital structure and the ability to run the water operations without large tariff increases.
Syabas, which is the sole water distribution company in Selangor, has a paid-up capital of RM100 million and it has to raise tariffs for the cash flow to be sustainable. With the new capital structure post acquisition, Splash's proposed water tariff hike is 2%-3% per annum or 9% every three years over the life of its proposed concession agreement of 30 years.
It is too early to conclude that the proposal has a greater chance of success than the state government's previous moves.
We feel that Splash's approach to the restructuring of water operations in Selangor does have some merits as it addresses the funding issue, offers a better exit price for the concessionaires and provides an alternative operating structure post consolidation, leading to a win-win scenario.
Concessionaires should view the offer as attractive.
The surprise takeover move by Splash is positive in terms of pricing as it provides a benchmark floor valuation for the water assets. Splash's offer raised Puncak Niaga Holding Bhd's floor valuation from RM3.21 to RM4.54. As highlighted in our 2QFY10 results note for Gamuda, the new capital structure for the potentially enlarged Splash implies that it would need to raise RM7 billion, being the RM10.8 billion total takeover price less the RM3.7 billion valuation for Splash.
Gamuda's 40% stake translated into RM800 million, to be funded by bank borrowings. The remaining 70% of the RM7 billion would be funded by securitised borrowings.
Working on the proposed 9% water tariff hike per annum, a 50% cut in the cost of treated water and 16% IRR for Syabas, we arrive at an estimated RM865 million discounted cash flow value for Syabas, which is 18.4% of the total estimated value of RM4.7 billion for the enlarged Splash.
We continue to rate the sector a trading buy, along with Puncak Niaga, which remained its top pick given the attractive takeover price from Splash.
We maintain an outperform on Gamuda as the group would end up with a 40% share of the enlarged Splash, enhancing our target price by 8.5% from RM4.24 to RM4.60, based on an unchanged 10% discount to revised net asset value (RNAV) - CIMB Research, March 29
This article appeared in The Edge Financial Daily, March 30, 2010.
