Water Sector - PAAB to announce the status by today

· Selangor says negotiations are ongoing whilst PAAB will announce the status by today… According to the Selangor’s chief minister in the recent press release the state government was still in negotiation with the remaining 3 concessionaires (PNSB, Syabas and Splash). The negotiation is to address the management of the water treatment plants after the take over. This news came in as a surprise as we think that the consolidation process could be further delayed. On the other side, the federal government will announce the status of the consolidation plan by today as we expect the federal government via Pengurusan Asset Air Berhad (PAAB) to intervene the consolidation of the assets.

· There is improvement in the revised offer but still not impressive as the O&M license issues not properly addressed. It is undeniable that the revised offer was much better with the offer price increasing to RM9.2b from RM5.7b. The improvement includes the SSG take over of the liabilities and the doubling of equity value to RM2.9b. Nevertheless, the offer missed out the essence of the whole consolidation story which is the post-consolidation structure i.e the O&M license. At this juncture, we think that the federal government is in a best position to award the O&M licenses hence making the offer more attractive.

· What is the “right price”? Presumably higher price? Tan Sri Rozali, the CEO of Puncak quoted that Puncak will consider the sale of its water assets if the offer price is right. Quoting the details from the news before the announcement of the revised offer, Puncak might be looking at a higher price suggesting more than RM6.00 if they opted to exit and to surrender the assets to SSG. Having said that, the implication of the sale of assets is at a higher price, Puncak is probably looking to exit the industry which we think is unlikely to happen.

· Puncak is valued at RM3.53 assuming the recent take over price is at 2008 book value. We understand the offer price from SSG includes the long-term receivables (related water assets) from the SSG amounted to RM405m. This leaves the equity value for its related water assets at RM2.73. By implying the remaining net asset value, Puncak is worth RM3.53 which is higher than its FY08 book value of RM3.30.