Water Monthly Review: December 2008

January 7, 2009 at 8:23 am Leave a comment

· Federal government plans to acquire water assets via PAAB
The federal government has moved into gear to go ahead with its national water consolidation exercise via Pengurusan Aset Air Bhd (PAAB). It plans to assume an estimated RM15bn worth of loans under the exercise, which would involve the relief of some RM7.9bn debt owed by state
governments to the federal government and another RM7bn worth of bonds issued by private water concession holders.
· Melaka kick starts the plans
Melaka was the first state to sign an agreement with the federal government to transfer RM899m worth of water assets. The state was relieved of RM770m worth of loans with the remainder RM119m channelled back into the state.
· Selangor faces an uphill battle
It was reported that Selangor had up till the end of March 2009 to get on board with the restructuring of its water sector. However, the situation in Selangor is more complex than other states due to the number of players involved.
Though there are a few issues that these parties have to resolve, the largest of these issues is the valuation of the assets. This is because the players want to be compensated for the concessions that they currently hold.

Water asset consolidation revs into gear

Federal government initiates nationwide consolidation

The federal government via PAAB is moving ahead with its plans to consolidate water assets in Peninsular Malaysia. The plan will see all state governments and concession holders relinquish their hold on the water assets in an effort to improve not only the quality of water, but also the management of water assets.
The assets will then be leased back to the state government, which will then distribute the water and maintain the infrastructure, while PAAB takes over the responsibilities of building and financing the water infrastructure projects.
The federal government plans to finance the acquisition by firstly relieving the state governments of loans due to the federal government, and should the assets transferred be valued higher than the loans, channelling the money back to the individual states. PAAB has stated that it estimates it will have to assume RM15bn in loans to completely finance the takeover exercise.
This would effectively result in the federal government assuming the state’s debt and water expansion needs, while the state has to only concentrate on the distribution and management of the water assets.
So far, the federal government is reported to be at various stages of negotiations with the individual state governments, with Selangor being one of the more complex.

Melaka has kick started the initiative

Melaka is reported to be the first state to ink an agreement with the federal government. The transfer of water assets in Melaka to PAAB will see the state relieved of RM770m worth of loans with the federal government and a potential inflow of RM119m into the state’s coffers. It was reported that the state would lease the assets for 45 years and an annual sum of RM26m. Apart from that it has been reported that Johor may sign an agreement in January, and that about RM900m in loans will be passed on to PAAB.

Selangor faces an uphill battle

The Selangor state government plans to initially consolidate all the water assets in the state before transferring them to PAAB. The state government has mandated its investment arm, Kumpulan Darul Ehsan Bhd (KDEB) to spearhead the consolidation exercise.
The exercise will involve the restructuring of 4 concession holders, which are Puncak Niaga Holdings Bhd (PNH MK, Buy, TP: RM3.00), Syarikat Pengeluar Air Sungai Selangor, Konsortium Abass Sdn Bhd (ABASS) and Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS).
It is a very high possibility that the assets will then be parked under Kumpulan Perangsang Selangor Bhd (KUPS MK, Hold, TP: RM2.10). The assets involved in the consolidation will encompass 7 dams, 35 water treatment plants and over 24,600km of pipes. The main issue with the consolidation is the valuation of the assets and the distribution the individual companies will get. Each company would want the maximum possible to satisfy their shareholders and would want to take the ownership of the concession into consideration. This would not fare well with the government, as it would want to take over the assets and its fair value.
The issue is compounded in this case because the assets will be initially consolidated under KUPS before being transferred to PAAB. This would mean that Puncak would have to get as much as possible from KUPS, who will then have to renegotiate with PAAB to get a premium for its assets,
By taking Melaka as a benchmark this would mean that Puncak would be able to transfer its assets for a total of RM4.6bn (RM1.5bn in property, plant and machine and RM3.1bn in development expenditure) as at 30 September 2008. However, this does not take into account the concession and the premium that Puncak’s shareholders would want as their return on investment. It is rumoured that Puncak is currently asking for RM6bn for its assets. Once consolidated, the process will then start all over again between KUPS and PAAB. However, it would not be possible to take the Melaka agreement as a benchmark as the water assets were only valued at their net book value in that agreement, and both Puncak and KUPS would want to act in the best interest of its shareholders.

Impact of current events

We maintain our call and target price for both Puncak and KUPS, as its price now only hinges on the selling price of its assets. Considering that they are both public listed companies, the transfer of assets would have to be on a willing-buyer willing-seller basis. The only questions are how long the individual concession holders will negotiate the transfer price and how much that transfer price would be.
The consolidation would result in a new business structure for KUPS, which will see all debt from the company transferred to either its parent, KDEB or a SPV, which would be incorporated for the consolidation exercise.
The new structure will see KUPS concentrating on water distribution and water asset management as all its non-water business will be transferred to KDEB.
TP for KUPS and Puncak maintained at RM2.10 and RM3.00 respectively.

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