CIMB Research retains Neutral on water sector

The suspension could be possibly the resolution of the impasse in the Selangor water deal.

KUALA LUMPUR: CIMB Equities Research is retaining its neutral outlook on the water treatment and services sector pending the Aug 10 water deal deadline for the takeover of Syarikat Pengeluar Air Selangor (SPLASH).

It said while diminishing political risks post-GE14 may prevent water deals from failing, it is too premature to conclude that the valuation range of RM2.5bil to RM2.7bil price tag will be acceptable to the latter’s shareholders.

“Gamuda’s 40% stake in SPLASH translates into RM1bil to RM1.1bil proceeds (41-44 sen/share).

“But we estimate a 15%-19% downside to net profit ex-SPLASH with possibly no special dividends given capex commitments for the Penang Transport Masterplan (PTMP),” it said. 

CIMB Research said the downside risks to its call are further delays in closing the water deal.

Upside risks are more details on the valuation basis for SPLASH and a revival of the federal government valuation top-up proposal ahead of the Aug 10 deadline.

A news report last Friday said the federal and Selangor state governments have agreed to a RM2.5bil to RM2.7bil price tag for the SPLASH takeover. SPLASH is  the last water treatment concessionaire to be taken over and consolidated under the state’s water operator Air Selangor. 

The news article did not provide any additional details of the valuation basis; it was one time price-to-book valuefor past takeovers.

The news report, quoting a source, said that the federal government has committed to fork out RM1.9bil (70%-76% of price tag), leaving the Selangor state government with RM600mil to RM800mil or 24%-30% of the unconfirmed valuation range for Splash. 

However, Minister of Water, Land and Natural Resources Dr. Xavier Jayakumar immediately refuted these claims of the federal government’s role.

In 2017 (pre-change in government), a similar ratio of valuation top-up was proposed but fell through, exacerbated by political differences/issues.

Unofficial price range is below one time book value of past successful takeovers, it added.