Splash sale in the offing

Streamlining operations: File picture shows the Semenyih dam. The Selangor state government has been consolidating all the disparate companies in the water sector since 2008, with Splash being the last piece of that exercise.

It will be a catalyst for shareholders such as Gamuda

A NEW offer for Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) could be in the offing, which would be a catalyst for one of its shareholders – Gamuda Bhd.

Shares in Gamuda have been actively traded, hitting an all-time high of RM5.29 this week, with analysts increasingly turning bullish about the company’s prospects.

Another shareholder of Splash, Kumpulan Perangsang Selangor Bhd (KPS), saw its share price soared more than 47% in the last eight days, hitting new highs.

Recall that the Selangor state government has been consolidating all the disparate companies in the water sector since 2008, with Splash being the last piece of that exercise. Splash is a major water-treatment concessionaire with about 45% of the total water supply capacity in Selangor.

Previous offers to buy out Splash were turned down by its shareholders but analysts reckon that this time around a deal could be struck.

Gamuda owns a 40% stake in Splash, which operates three water treatment plants in Selangor. Other shareholders in Splash are KPS with 30% and Sweetwater Alliance Sdn Bhd, a company controlled by businessman Tan Sri Wan Azmi Wan Hamzah, with a 30% stake.

Splash is the only water concessionaire left in the state that is still held privately.

In 2013, the state government has taken over Puncak Niaga Holdings Bhd (PNSB) and water distribution concessionaire Syarikat Bekalan Air Selangor (Syabas) in 2013, for combined offer of RM5.6bil (RM3.12bil for Syabas and RM2.48bil for PNSB).

Konsortium Abass, a water treatment player and a 90.83% unit of KPS, accepted an offer of RM990.2mil.

The speculation of a new offer for Splash came about following a meeting between the federal government and Selangor state government last Friday.

CIMB Research analyst Sharizan Rosely reckons that the meeting is likely to result in a deal struck between the parties.

“Findings from our own channel checks seem to suggest a promising outcome, provided that the main condition of a water tariff hike in Selangor is fulfilled.

“In our view, it is the politics of the water tariff hike issue rather than pricing (valuation) would make or break the deal.

“All eyes are on the April timeline for a new offer for Splash,” he says in a report.

It is understood that the Selangor state government and Splash are actively working on an agreement on the valuation of the latter. This is coming about after the previous deal was given a six-month extension period until April 2017.

In 2013, Selangor had offered RM1.83bil to acquire the equity and liability portions held by Splash.

However, after netting off loans of RM1.56bil, the offer would only bring in net cash proceeds of RM250.6mil to its shareholders.

Splash has previously contended that any offer, after netting off liabilities, should be close to its book value of RM2.8bil. This would mean that Splash is hoping for a buyout price of more than RM4bil.

It should be noted that the federal government has said that as a last resort, it may resort to forcefully taking over Splash as stipulated under Section 114 of the Water Services Industry Act 2006 to complete the state’s water restructuring exercise.

Meanwhile, analysts say that if the Splash sale does go through, Gamuda could be dishing out special dividends as well as paring down its gearing level from the sales proceeds.

CIMB’s Sharizan says the bonus dividend could yield between 2% and 5%, on a hypothetical RM1.1bil share of proceeds.

Another catalyst for Gamuda is the several big-ticket projects slated to be announced this year and related to the rail system. These include the Gemas-Johor Baru double-tracking project (RM8bil) and East Coast rail link (ECRL) project (RM55bil).

Aside from these two projects, analysts say Gamuda is planning to bid for the light rail transit (LRT) Line 3 and Pan Borneo Highway Sabah projects and targets to secure between RM3bil and RM4bil in new contracts in financial year 2017.

“We estimate the tunnelling and underground works for major rail salejobs to be worth a total of RM41bil,” Sharizan says, adding that Gemas-Johor Baru rail and LRT 3 are potential job catalysts for Gamuda.

Gamuda’s unbilled construction order book as at Jan 31, 2017, stood at RM8.3bil.

Shares in Gamuda closed at RM5.29 yesterday, at a historical price-earnings ratio of 20.2 times.

According to Bloomberg data, there are 18 “buy” calls on Gamuda, four “hold” and two “sell”.

“Gamuda is the best proxy to the booming construction sector in Malaysia,” says AmInvestment Bank.

It says Gamuda is backed by its dominant role in mass rapid transit (MRT) as the project delivery partner and tunnelling contractor and its involvement in Pan Borneo Sarawak Highway.

“Our forecasts assume Gamuda would secure RM2bil new jobs annually in FY17 to FY19,” AmInvestment says.

Aside from the construction sector, Gamuda is sitting on unbilled sales of RM2bil from its property division.

For the first half of financial year ended Jan 31, 2017 (FY17), Gamuda’s property sales more than doubled to RM783mil, from RM385mil in the same period last year. This was largely due to its Vietnam projects.

AmInvestment says Gamuda is targeting property sales of RM2.12bil in FY17, which is comparable to the RM2.05bil achieved in FY16.

About 40% of its property sales was contributed by the Vietnamese market, while the balance 60% is from Malaysia.

For the second quarter ended Jan 31, 2017, Gamuda saw its net profit rising 3.8% to RM166.3mil, mainly due to cost savings from the near-completion of underground works for MRT Line 1.

The group also recorded a 61.9% jump in revenue for the quarter to RM853.9mil compared to a year ago, supported by the higher work progress related to the underground and elevated works on the Klang Valley MRT Line 2.

For the year-to-date period, the group saw revenue rising 30.6% to RM1.36bil, while net profit increased by 2.2% to RM328.4mil.

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