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.

Water - Roundtable meeting around the corner

Sector Update

Water - Roundtable meeting around the corner

The recent award of tunnelling work (Lot 1-1) in the Pahang-Selangor Water Transfer (PSWT) project to Shimizu consortium has emerged as a catalyst for the Malaysia water sector. Other counterparts, Nishimatsu, IJM Corp and UEM Builders hold 30%, 20% and 20% stake in the consortium, respectively.

· The tunnelling works being the blueprint for PSWT. This is a crucial piece in the PSWT project universe as it will bring the spill over effect to the overall project and the water industry itself. The tunnelling work includes construction of a 45km- long tunnel from Semantan intake / reservoir in Pahang to the future water treatment plant in Langat, Selangor. The contract sum is estimated at RM1.3b. There will be two pipelines with diameter size of 3m to connect the Kelau Dam to the Semantan pipeline. The project tender is expected to be awarded to local pipes manufacturers and contractors in the near term. Apart from the Pahang tunnelling side, the Semantan pipeline (12km) will be the immediate catalyst for the water industry.

· Langat II project award another leg up for the industry. The tender for the project is likely to take place late this year. It is pretty much anticipated in the market that the tender of Langat II project (Lot1-2) will be out in the near term possibly in the 3Q09. Nevertheless, we opined that the award of the project will only be announced early next year (2010) whilst the tunnelling work will be ready in the next 5 years. This will benefit the water related companies which have the capability and proven track record in the previous water projects. Langat II project is under the purview of PAAB or WAMCO (Water Asset Management Company) – wholly owned by Ministry of Finance authority (MOF).

· Selangor water restructuring chronicles continue as the roundtable meeting is around the corner. The new date set up by the new Minister in Ministry of Energy, Green Technology and Water (MEGW) to unravel the issue by end of June 2006. Currently, the Selangor water concessionaires are in the midst of negotiations with the Selangor state, federal and PAAB through several meetings this week and next week. The end-June 09 dateline is seen to be imminent at this juncture.

Water – Shimizu-led consortium wins tunneling job

It was reported in the news that Shimizu consortium which includes Nishimatsu, IJM Corp and UEM Builders Bhd through 30:30:20:20 joint venture had won the tunneling job for Pahang-Selangor water transfer project (Lot 1-1). IJM in its announcement yesterday quoted that the tunneling job worth RM1.3b and the construction will take about 5 years time to complete.



· Positive development for water sector. We view this news as a positive development for the water sector as it will provide more certainty in the long awaited Pahang-Selangor water project and hence a crucial development to move the water industry which has been in an uncertain period for a long time especially for the steel pipes manufacturers. The works involved the construction of 45km tunnel. To recap, apart from Shimizu, Taiseh Corp and Kajima are the other bidders for the project.

· The project cost RM1.3b came slightly lower that our expectations. In our previous sector report dated 13th April 2009, we expect the project to cost RM1.5b which is slightly higher than the sum of the contract awarded to Shimizu. We also understand that Shimizu was the lowest bidder for the project followed by Taiseh Corp. At first, Shimizu’s in its bid, attached the VO clause which we think could inherited some cost overrun risk in our perspective. On the financing part from Japan Bank for International Cooperation (JBIC) is providing the loan up to RM2.5b for the project. We expect the construction will take off anytime soon this year.

· Tunnel aside, Langat 2 in the making. The implementation of Langat 2 project will definitely be a re-rating catalyst for the water industry players especially in Selangor. The construction and maintenance of water reservoirs and water treatment plant contract is to be awarded to local companies through an open tender as referred to PAAB. We understand that most of local water players like JAKS Resources Berhad (JAKS) and Salcon Bhd has been eyeing for the construction and the pipe laying works for quite sometimes as they have the capacity and track record to supply the pipes for water related projects.

· Selangor water restructuring a laggard issue. At present, there are no positive developments for the Selangor water restructuring as the recent the meeting between Datuk Peter Chin of KTAK and Tan Sri Khalid leaves the issue unsolved. At this juncture, the ability of the federal government to come up with better offer and award of O&M license to the existing players will likely end the industry restructuring issues. We are maintaining our BUY call for Puncak with the target price of RM3.86.