Water Weekly Review: 12th – 18th January 2009

January 20, 2009 at 1:01 am Leave a comment

• Negeri Sembilan next to ink agreement.
It was reported that Pengurusan Aset Air Bhd (PAAB) is set to sign its 2nd deal for the takeover of water assets with the Negeri Sembilan government on the 20th of this month. Though no specific details were given regarding the exercise, it was said that the deal would be worth over RM1bn
• Basis of valuation.
Details on the said deal has been scarce but it is likely that the valuation of the assets would be similar to that of the deal with Melaka, which would be based on the net tangible assets (NTA) of the assets in the state.
• All eyes still on Selangor.
Though it is clear that the national consolidation of water assets exercise is clearly very important, most investors would be more interested in how the transfer of assets by other states would impact the transfer of assets from the 2 major players in Selangor.
• TP maintained for KUPS and PNH.
We are still neutral on this sector as we believe that most of the negative news within the sector has already been priced in. This means that the only catalyst that can spur some interest in KUPS and PNH is the signing of the water assets consolidation agreement. The problem at this time is that the agreement is very strongly related to the pricing of the water assets. For now we maintain our target price and our call on both KUPS and PNH.

National Water Assets Consolidation Moving Forward

Negeri Sembilan next to ink agreement
PAAB is set to ink an agreement with Negeri Sembilan on the takeover of its water assets. It was reported that agreement will be signed this Tuesday (20th January 2009) in Putrajaya and would be officiated by Deputy Prime Minister, Datuk Seri Najib Razak. Though details of the agreement have been sketchy and would only be released when the agreement has been signed, it is rumoured that Negeri Sembilan would get over RM1bn for its assets.
Johor was initially pegged as the 2nd state that would sign a deal with the Federal Government, but the signing of the agreement with Negeri Sembilan came in before Johor. It is widely believed that Johor will be next to sell its assets to the Federal Government and it is believed that over RM900m in loans will be transferred from the State Government to PAAB.

Basis of valuation
Other than the rumoured RM1bn, there have been very little details on the agreement between the Negeri Sembilan government and PAAB. However, it is very likely that the deal would be in tune with the deal that PAAB had signed with Melaka 3 weeks ago.
To recap, Melaka became the 1st state in the country to transfer its water assets to PAAB. The transfer of water assets in Melaka to PAAB saw the state relieved of RM770m worth of loans with the Federal Government and a potential inflow of RM119m into the state’s coffers. The acquisition price of the assets was reported to be its NTA. It was stated that the state would now lease the assets from the Federal Government for 45 years at an annual sum of RM26m.
Considering that the water assets of the Negeri Sembilan government also belongs to the state and not a public listed company (PLC), the water assets would most probably be taken over at its NTA.

All eyes on Selangor
Though the national water assets consolidation exercise is clearly an important issue, most investors would be more interested on the impact of the acquisition price of the water assets from the other State Governments on the price that would be paid to the water players in Selangor.
The main issue is that the water assets are held by 2 PLCs, Kumpulan Perangsang Selangor Bhd (KUPS) and Puncak Niaga Holdings Bhd (PNH). Both companies would clearly want to act in the best interest of its shareholders, which would mean that both companies would want to get as much as possible for its assets and also the concessions held. This would definitely result in the 2 companies going head to head with the Federal Government, which currently plans to acquire all the assets in the country for about RM15bn. Furthermore, the Selangor State Government has mandated its investment arm, Kumpulan Darul Ehsan Bhd (KDEB) to spearhead the consolidation exercise within the state. This means that there would essentially be 2 agreements, the 1st between KDEB and PNH, and the 2nd between KDEB and the Federal Government. The agreements are supposed to be signed back to back.
The problem once again comes down to pricing, as PNH and its shareholders would want as much as possible for its water assets, and KDEB would also be probably looking at a slight premium when it sells its assets to the Federal Government. Furthermore, the acquisition price would have to get shareholders approval before it can be executed, and this would be hard to do if a fair value is not given for the assets and the concession held.
This scenario is very different from the scenario faced by both the Melaka and Negeri Sembilan State Governments.

TP maintained on KUPS and PNH
We are still neutral on this sector as we believe that most of the negative news within the sector has already been priced in. This means that the only catalyst that can spur some interest in KUPS and PNH is the signing of the water assets consolidation agreement. The problem is the pricing of the assets, as the direction the share price would take would be very much influenced by the consolidation agreement.
The problem at this time is that the agreement is very strongly related to the pricing of the water assets. Unlike Melaka and Negeri Sembilan, the water assets in Selangor will have to be based on a willing buyer, willing seller concept. This is going to get a little tricky, as the price that is acceptable to the shareholders of the company may not be an agreeable price for the Federal Government. For now we maintain our target price and our call on both KUPS and PNH.

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Telecommunications Weekly Review: 12th – 18th January 2009 20 January 2009 Newz Bits

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