Delay in Selangor water plans slightly negative for Salcon

KUALA LUMPUR: CIMB Equities Research says the delays in the water consolidation in Selangor is slightly negative for Salcon’s tender book, as most of the group’s RM2bil jobs in tender are outside of Selangor. 

However, it said on Friday a resolution to the water consolidation in the state would be positive for Salcon, as it would free-up more jobs for tender. 

“We would then expect more clarity on the implementation of the RM1bil Langat 2 water treatment plant (WTP) phase 2. Salcon is part of the consortium undertaking phase 1 construction. The group is vying for phase 2,” it said.

To recap, CIMB Research said issues pertaining to the water consolidation plans in the state of Selangor (water treatment and supply) and the stalled water capex are back in the limelight. 

This follows its recent checks about the status of the Master Agreement (signed last year), which was reportedly targeting July 2016 to revive the water deals and revisit the acquisition of Syarikat Pengeluar Air Selangor Sdn Bhd (SPLASH), which is 40%-owned by Gamuda, and the related O&M companies. Recall that the SPLASH deal was rejected at 0.1 time book value or RM250mil.

StarBiz reported that Pengurusan Air Selangor (the new state-led water company), which has spent close to RM850mil in capex since 2011, may face delays in obtaining its operating license due to uncertainties relating to the SPLASH deal. 

“This, in turn, has delayed its submission of a three-year capex plan (2016-18). Major upgrading works could be deferred. This could pose a risk to water infra jobs in the state, particularly those related to non-revenue water (NRW) works and pipe replacements, in our view,” the research house said.

SPLASH continues to be the last targeted water operation. Similar to the completed RM1.6bil deal with Puncak Niaga, Splash will be converted into a licensed operator, whereby Air Selangor take over the O&M via a sale-and-leaseback model with the federal government. 

Air Selangor CEO Suhaimi Kamarulzaman said there are two options: 1) converting to a licensed operator after acquiring Splash, or 2) sorting out the licence prior to the buyout while SPLASH remains a concessionaire.

Nevertheless, Suhaimi believes that the state can achieve a resolution for Splash by year-end as “respective shareholders will sit down and achieve a number (valuation) that everybody can be happy with”.

“In our view, negotiations on SPLASH looks likely to pick up pace from July with the possibility of completion by year-end. However, uncertainties as to whether SPLASH will be granted the one time book value pricing benchmark (RM2.8bil), and if the other O&M companies can fully recover its receivables remain at this juncture,” it said.

CIMB Research retained its Neutral stance. It added Federal and state government-led negotiations in the coming months could spell upside risks to the stalled water talks. 

“Delays and valuations remain two key risks for Gamuda and related O&M companies. Delays in water capex in Selangor could be negative for water infra tenders including NRW and pipe works, too. We are looking at potential cash proceeds of RM1bil to RM1.2bil (assuming 0.9 time to one time book value price tag) for Gamuda upon divesting its 40% stake in Splash. We retain our Hold call on Puncak Niaga given its weak earnings prospects post-water asset sale,” it said.

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