Bumper dividend from Puncak?


Although its share price is up, it needs to fill earnings gap from water ops exit

WITH RM1.6bil cash from the completion of the sale of its water-related assets in Selangor, the focus has turned to whether Puncak Niaga Holdings Bhd will declare a bumper dividend to reward shareholders.

Recall that Puncak Niaga’s board had previously committed to paying out a special dividend per share (DPS) of RM1 per share, which would amount to a maximum distribution of RM534mil.

CIMB Research’s Sharizan Rosely says the declaration of RM1 per share special dividend is the next catalyst for the stock, which will translate to an attractive 35% yield.

On Bursa Malaysia, investors greeted the news positively with Puncak shares closing up 7% to RM2.85 with 2.36 million done.

“With the cash in hand, the coast is now clear for Puncak Niaga to declare the dividend, which we believe is likely in November. We believe the cash payout could be realised as early as December or in the first quarter of next year,” he says in a report.

Puncak Niaga’s major shareholder, Tan Sri Rozali Ismail stands to reap a whopping RM167.42mil from the 40.25% interest he has in the stock.

Other substantial shareholders are Lembaga Tabung Haji with 9.64%, the Employees Provident Fund board has 5.05%.

On Thursday, Puncak Niaga told the stock exchange that it had received the RM1.55bil net proceeds from Pengurusan Air Selangor Sdn Bhd for the sale of its 100% interests in Puncak Niaga Sdn Bhd (PNSB) and 70% stake in Syarikat Bekalan Air Selangor Sdn Bhd.

The announcement marks a major milestone in the Selangor water restructuring exercise after seven years of protracted negotiations.

PNSB once held five water treatment concessions with the state government while Syabas had the concession to distribute water in Kuala Lumpur, Putrajaya and Selangor.

These entities now belong to the Selangor state government via Air Selangor – the state-owned entity which will eventually run the operations and maintenance of treatment plants and distribution network of the state.

For the state, the only acquisition left to complete the water restructuring exercise is Gamuda Bhd’s Splash or Syarikat Pengeluar Air Selangor Holdings Bhd.

CIMB’s Sharizan says Puncak Niaga’s market capitalisation of RM1.2bil is still 23% below the divestment value of RM1.6bil, which he says was due to the prolonged delays, valuation issues and political risks in the water restructuring process. He expects the discount to narrow following the completion of the sale.

The research firm has pegged the stock’s target price at RM3.4O, an upside of some 19%.

On a year basis, the shares are still down by some 9.5%. The stock had soared to a 52-week high of RM3.74 in November last year.

RHB Research notes that the RM1.55bil net proceeds will translate into a hefty RM3.72 per share based on the company’s existing 418mil share base. “That said, we expect progressive conversion of its outstanding warrants and convertible sukuk ijarah into ordinary shares to be entitled for the special DPS.

However, RHB Research expects “the quantum of the special DPS to be confirmed in the first quarter of next year, with physical payments to take place thereafter.”

Earnings gap

Business-wise, Puncak Niaga will now have two key profit generators: oil and gas (O&G) and water/sewerage/infrastructure construction.

But this may not be enough to fill in the earnings gap with the water concessionaire businesses out of the equation.

For the first six months of financial year ending Dec 31 2015, the O&G segment posted losses of RM20mil, while the water construction arm made a small profit of RM2mil. To put it into perspective, net profit for the six months came in at RM124.81mil on a turnover of RM128.92mil.

Notably, the company’s core pre-tax profit continued to be in the red for two consecutive quarters, largely due to the weak oil and gas segment that relies on its derrick lay barge business.

“We expect Puncak Niaga to close in the red for FY15 amid the O&G industry’s headwinds following the slump in crude oil prices,” says RHB Research.

It believes that the group would return into the black by FY16 as “we gathered that management is implementing various costs-cutting measures to help boost profitability over the medium term.”

The company has earmarked the balance of the proceeds of about RM1bil for either O&G or palm oil plantation ventures.

Puncak Niaga diversified into the O&G sector since 2011 through wholly-owned Puncak Oil & Gas Sdn Bhd.

It has secured Package B of the Pan Malaysia integrated offshore installation contract worth some RM1.8bil over a three-year period from 2014 to 2016.

It is also keen to expand into the plantation sector and is reportedly eyeing some oil palm estates.

How it stack it cards to build its future business will shape investor sentiment in the long haul.

As AmResearch puts it: “Puncak’s next move will be crucial in other to fill the earnings gap following the sale of its water concessionaire businesses.

“Our ‘hold’ call remains as we await Puncak’s next move beyond the dividend payout,” says the firm placing the stock’s fair value at RM2.80.

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