Puncak looking up, but political risks remain

by **Cals** Mon 08 Jul 2013, 01:40

Published: Friday July 5, 2013 MYT 11:52:00 AM
Updated: Friday July 5, 2013 MYT 11:54:17 AM
Puncak looking up, but political risks remain

KUALA LUMPUR: Selangor water-related shares have surged this week on news that the Federal Government had finally agreed to the Selangor government taking over water assets in the state. However, there are still political risks ahead, saidAmResearch as it cautioned investors to temper their enthusiasm.

For now, it is maintaining a “hold” call on Puncak despite share prices having surged 25% over the last two days – but with a higher fair valuation of RM2.41 per share, from RM1.55 previously. (Puncak was trading at RM2.59 at 11.30am)

“Our fair value has also been tweaked to take into account: (i) a proposed RM165mil Convertible Sukuk with up to 41mil free warrants (1-for-10); and (ii) the de-consolidation of results from 70%-owned unit, SYABAS,” it said.

On the positive side, the Selangor government wants to conclude the deal by yearend. Mentri Besar Tan Sri Khalid Ibrahim was even reported to have said yesterday that the state government might give its blessings for the proposed Langat 2 project, provided the price was right.

However, AmResearch said it would be pre-mature to turn fully constructive on Puncak, and the water sector as a whole for the time being.

It pointed out that all parties needed to achieve consensus on valuations despite receiving the endorsement at the Federal level, noting that Selangor’s water industry remains fragmented with ownership by multiple private entities.

Also, it was still unclear at this point if there would be a new offer tabled by the Selangor government, and at what price and terms. After all, the state’s RM9.6bil takeover offer for the state’s four private water entities just days before the General Election on May 5, 2013 failed to take off.

“(In addition), another valuation hurdle may come in the form of pricing for the physical water assets owned by the Selangor government (e.g. pipelines, reservoirs), and how it would be funded. And we wonder if both the Federal and Selangor governments can agree to the pricing of Langat 2 – and its implications on future water tariffs – before negotiations on the water restructuring issue are concluded,” it said.

“Until more concrete details on key valuation parameters are attainable, we maintain our HOLD rating on Puncak. Timing and political risk remains as key issues,” it said.