Puncak Niaga Holdings

Puncak Niaga Holdings- Revised RM5.3b offer still not impressive (Company Update)

Price: RM3.30
Target Price: RM3.86
Recommendation: BUY

· The RM5.3b offer includes RM4.1b debt and RM1.2b equity. The offer has improved by an additional RM2.2b to the previous offer of RM3.1b in February 2009. The offer comprises of RM1.9b and RM3.3b for PNSB and Syabas, respectively. Puncak is given the option either to retain the debts or be assumed by the SSG. The equity value of RM1.2b translates to RM2.73 sen per share (100% and 70% stake in PNSB and Syabas).

· Details of the offer are vague and inconsistent. After scrutinizing the offer details, there are few inconsistencies in the conditions of the sales and purchase vis-à-vis the offer to ABASS and SPLASH. The inconsistencies are, (1) the basis of financial year for the assets and liabilities (2) the condition to sale the assets to PAAB subsequently (3) the rationale of valuing the equity value, which is missing and not well interpreted in the offer letter. Thus, it creates presumption of the assets and liabilities to be held by SSG and not by PAAB, subsequent to the sale.

· Puncak is valued at RM3.53 assuming its FY08 audited book value and it is still not impressive. Assuming the offer is based on Puncak’s FY08 audited accounts via BV method; Puncak is valued at RM3.53 and largely ignores the future income of the concessions. We also understand that the offer includes the long term receivables to the state government amounting to RM405m arising from the sale of water to the state. Based on our analysis, the BV of its water assets (inclusive the long term receivables and its net debt) as at FY08A could reach up to RM4.47 sen per share which is higher than the state’s offer for equity value of RM2.73.

· It is worth to refute the offer hence paving ways for PAAB to take the lead. Despite the slightly higher offer price, we think that it is worth it for Puncak to turn down the offer as it is still not attractive and the price is deemed low. The next move, we expect that SSG will request for time extension from the federal government whilst PAAB is likely to take the lead since SSG has been given two separate datelines to wrap up the consolidation.

· Reiterating our BUY call with unchanged target price of 3.86. Our target price is pegged at 20% to our full DCF valuation of RM4.82.