MIDF Research upgrades Puncak Niaga to buy, raises target price

by **Cals** Tue 22 Oct 2013, 14:17

Business & Markets 2013

Written by Cynthia Blemin of theedgemalaysia.com

Tuesday, 22 October 2013 13:09

KUALA LUMPUR (Oct 22): MIDF Research has upgraded Puncak Niaga Holdings Bhd to ‘Buy’ from ‘Neutral’ at RM3.25 with a higher target price (TP) of RM4.04 on optimism that the sale of the water assets would be resolved by year-end.
Although shrouded with uncertainties, is optimistic that the sale of the water assets will go through as the need for additional treated water for Selangor and Kuala Lumpur is pivotal, said the research house in a note today.
It opined that water reserve level in the state is hovering at 1% and water demand growth is +3.5% per annum.
It noted that continuous delay may cause severe water shortages, exacerbated by the risk of unforeseen events as manifested by the incident of diesel spillage into Sungai Selangor on August 30, which affected 1m consumers.
“After the sale of water assets, we believe that the company may declare a special dividend.
“Since we are still unclear with the actual terms and value of the sale, we are conservatively assuming 7.3sen dividend to be paid in 2014, which in our forecast, constitutes a dividend payout ratio of 15%,” it said.
However, it noted that after the sale of its water assets, Puncak Niaga will cease to be a water concessionaire (both water treatment operator and water distributor) in Selangor.
MIDF Research said the National Water Services Commission (SPAN) will be the regulator, Selangor state government will be the operator/concessionaire and Pengurusan Aset Air Bhd (PAAB) will be the asset owner.
In addition, due to the changes in accounting treatments (IAS28), SYABAS’s assets and earnings has not been consolidated into Puncak Niaga Holdings Bhd’s books starting this year, it added.
It also opined that Puncak Niaga is “not out of the game yet” and will still stand to benefit in the water business, deriving revenue from other water construction projects, piping, supply, project management, rural water supply developments.
In addition, the research house noted that Puncak Niaga are hunting for water concessions overseas in China, Cambodia, Vietnam and Thailand.
It said the company is particularly interested in industrial waste water treatments where margins are reportedly higher.
The research house stated that it has conservatively included contributions from Puncak Niaga Sdn Bhd until 1H14.
Its recommendation which was previously placed under review to a buy call with an increased TP of RM4.04 per share, represents an implied PER14 of 8.3x, it said.
The research house’s valuation is based on the sum-of-the-parts method which takes into account the amount offered for 100% Puncak Niaga Sdn Bhd, 70% SYABAS, proceeds from the convertible sukuk and full warrant conversion, it added.