Puncak Niaga - BUY - 16 Feb 2009

Puncak Niaga – An offer to refute (Company Update)

Price: RM3.12
Target Price: RM3.86
Recommendation: BUY

l Formal offer for Puncak’s water assets at RM3.1b. The Selangor state government has finally made its offer to buy all water assets in Selangor for RM5.15b. Puncak received an offer from the state government to buy its
water assets for RM3.1b. The offer comprises of RM1.6b and RM1.5b for PNSB and Syabas, respectively. The price is derived from the book value of the assets as at 31st December 2007 excluding the outstanding debt. Puncak will have to revert by 20th February on the offer.

l The offer price is below market expectations. The valua tion base was the book value of the assets, which is unattractive to Puncak given that it is unable to even repay all its debts outstanding comprising bonds and Islamic commercial papers. Pun cak’s net debt reported at RM2.1b and 3.5b in FY07 and 3Q08, respectively. Puncak is valued at RM2.46 using a 1x its BV as at FY07. The state government would have to make an offer of RM5b if the valuation of Puncak post-selling its assets is our target price of RM3.86.

l The crux of the valuation in PNSB and SYABAS is the concession agreements. Given that the sanctity of the concession agreements will be honoured, Puncak has the option to maintain its status quo until the concession period expires in 2034. Existing Islamic bond covenants will also have to be res pected in the process of the sale of assets. Should the government intervene to force the sale of Puncak’s assets, the indirect repercussion on foreign direct investment would be very negative and overall corporate bond ratings especially for other concession companies would be negatively affected.

l The negotiations are stil l on-going. We are neutral on the announced offer price as we expect it would not turn to be much attractive. Puncak will have until 20th February to revert on the offer which we believe the management will reject and counter with a higher price. Nevertheless, in our view, the bargaining power is still with Puncak and they may opt to remain as status quo should the negotiation fail.

l We are maintaining our BUY call with unchanged target price of RM3.86 based on 20% discount to our DCF valuation of RM4.82. Given the low offer price which translates to RM2.46 per share, we expect the share price to react negatively. The main catalyst for the share price will be the outcome from further negotiations on the offer price.