Kota Marudu Member of Parliament

CIMB Research retains Neutral call on water sector, prefers Taliworks

KUALA LUMPUR: CIMB Equities Research retained its Neutral call on the water sector on the back of persistent delays in Selangor's water restructuring. 

It said on Monday for exposure to the recovery of the water asset sale theme, it continues to like Gamuda Bhd due to  the cash proceeds from the divestment of Syarikat Pengeluar Air Selangor Holdings Bhd (SPLASH) for RM1bil to RM1.2bil, assuming 0.9-1 time book value price tag). 

“For post-restructuring exposure, we prefer Taliworks for the likely special dividends (on top of the current 5.4% dividend yield) and new tender prospects,” it said.

A news report said the discussion between the Selangor government and SPLASH on the takeover of the latter's water concessionaire will be extended beyond the Oct 7 deadline.  

The Energy, Green Technology and Water Ministry have given the green light to extend the deadline until the two sides can come to a mutual agreement on the price of Splash’s assets. 

“This could take a few months. We see this as a slight negative for Gamuda but not a big surprise given the lack of progress of late,” it said.

CIMB Research pointed out that although there has been a valuation conflict, as indicated by the last rejected offer of 0.1 time price-to-book value (P/BV) of RM251mil, the invocation of Section 114 of the Water Services Industry Act (WSIA) (that is compulsory acquisition based on national interest) is still a far-fetched scenario.

Gamuda's recent guidance hints at a more palatable valuation for SPLASH, with end-2016 as a more realistic time frame for the parties to come to an agreement, in our view. SPLASH’s current book value is RM2.8bil.

The news report highlighted that the issue, at present, is that the Selangor state government needs funds to acquire SPLASH. In its last water asset takeover, RM1.6bil from the federal government was used to acquire Puncak Niaga’s two water operations. In the case of SPLASH, the Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili was quoted as saying that Selangor has yet to reveal the new valuation for SPLASH.

“While Gamuda would benefit from potential cash proceeds selling its 40% stake in SPLASH, Taliworks is another potential post-restructuring play. Its existing operations and maintenance (O&M) agreement for Sungai Harmoni (SSP1) in the Selangor state is likely to be retained. 

“Taliworks could also recover RM400mil in water receivables and partially return that to shareholders as special dividends. The group could also tender for new water infra-type jobs in the state.

“It appears that end-2016 is the next hurdle for the revival of the water restructuring theme in Selangor. We believe there is still a strong conviction from the Selangor government to finalise the terms with SPLASH, given that it is the last water asset in the state to be acquired,” it said. 

Air Selangor CEO Suhaimi Kamarulzaman said in June that the company has two options: 1) convert into a licenced operator after acquiring SPLASH or 2) sort out the licence prior to the buyout while SPLASH remains a concessionaire.

Source : TheStar