Water consolidation seen by year-end

by **Cals** Wed 23 Oct 2013, 11:27

Business & Markets 2013

Written by MIDF Research

Wednesday, 23 October 2013 10:42

Puncak Niaga Holdings Bhd
(Oct 22, RM3.30)
Upgrade to buy at RM3.25 with a target price of RM4.04: Media sources have quoted Selangor Menteri Besar, Tan Sri Khalid Ibrahim, as saying that the state government plans to conclude the water consolidation process by year-end, and Putrajaya has reportedly concurred.

The offer price, apparently, is as per proposed in the fourth offer made in February 2013.

We understand that the terms are still unclear at this point in time. Assuming that an offer is produced by year-end, completion of transfer could be achieved in the second quarter of 2014 (2Q14).

Although shrouded with uncertainties, we are optimistic that the sale will go through as the need for additional treated water for Selangor and Kuala Lumpur is pivotal. The water reserve level in the state is hovering at 1% and water demand growth is +3.5% per annum. The continuous delay may cause severe water shortages, exacerbated by the risk of unforeseen events as manifested recently when diesel spilled into a tributary of Sungai Selangor, affecting a million consumers in the Klang Valley.

Stakeholders in the water industry reckon that the construction of Langat 2’s 1,890mld treatment plant has to be concurrent with the sale of the water assets, as construction may take three to four years. After all, the Pahang-Selangor water transfer tunnel is now more than 80% completed. Although the federal government has allocated funds for mitigating projects such as increasing treatment capacities and pipe lengths for water diversions, construction of Langat 2 is still paramount. As such, we are confident that the water issue will be resolved for the benefit of the public.

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. The National Water Services Commission (SPAN) will be the regulator, Selangor government will be the operator/concessionaire while Pengurusan Aset Air Bhd (PAAB) will be the asset owner.

In addition, due to the changes in accounting treatments (IAS28), Syarikat Bekalan Air Selangor Sdn Bhd’s (Syabas, a subsidiary of Puncak Niaga) assets and earnings were not consolidated into Puncak Niaga’s books starting this year.

However, Puncak Niaga will still be in the water business, deriving revenue from other water construction projects, piping, supply, project management, rural water supply developments, among others.

The group is also hunting for water concessions in China, Cambodia, Vietnam and Thailand. The company is particularly interested in industrial waste water treatments where margins are reportedly higher. We conservatively included contributions from its subsidiary Puncak Niaga Sdn Bhd until the first half of 2014 financial year (1HFY14).

Apart from offshore support services, Puncak Niaga is looking further at upstream exploration and production (E&P) opportunities. In March 2013, its wholly owned subsidiary GOM Resources Sdn Bhd signed a memorandum of agreement with Indonesian public-listed E&P operator Medco Energi Internasional Tbk to cooperate in oil and gas field development projects and risk service contract (RSC) projects in Malaysia.

We believe that this is a marriage of convenience as Medco has the necessary E&P expertise whereas Puncak Niaga has the financial muscle and local advantage.

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In addition to undertaking RSCs, media reports have indicated that Puncak Niaga is also keen to buy brownfield oil producing blocks from Newfield Exploration Co, which will be disposing of its oil producing blocks in Malaysia and China. We believe that at this juncture, Puncak Niaga is also eyeing Malaysian fields. Media reports have named Hibiscus Petroleum Bhd as Puncak Niaga’s partner in this bid, the results for which will be known by year-end.

Moving forward, we opine that Puncak Niaga’s oil and gas segment will be a key revenue driver for the group. In 2012, the oil and gas segment contributed revenue of RM778 million, while the water related construction segment contributed revenue of RM342 million.

In our valuation, we expect the group’s oil and gas segment to contribute revenue of between RM530 million and RM650 million for 2013 and 2014 with a conservative blended pre-tax margin of 10%. Further upside is seen as it is looking at partnerships with engineering,procurement, construction, installation and commissioning (EPCIC) companies in China and Australia.

With the pipelay barge DLB 264, which is capable of lifting 1,110 tonnes and laying pipes up to 60 inches in diameter, we believe that GOM Resources is eyeing several packages in the Petronas Integrated Transportation & Installation Offshore Facilities project. The entire campaign has an estimated combined value of RM15 billion to RM20 billion.

The packages under this project are divided into barge lifting capacities; with Package A (250-300 tonnes), Package B (300-800 tonnes), Package C & D (800-2,800 tonnes) and Package E (more than 2,700 tonnes).

We are upgrading our recommendation from “review” to “buy” with an increased target price of RM4.04. This represents an implied FY14 price-earnings ratio (PER14) of 8.3 times.

Our valuation is based on the sum-of-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.

We are attaching PER14 of 14 times to the oil and gas segment, which is our average medium-cap oil and gas service providers target PER on Bursa Malaysia. — MIDF Research, Oct 22

This article first appeared in The Edge Financial Daily, on October 23, 2013.