The suspension could be possibly the resolution of the impasse in the Selangor water deal.
KUALA LUMPUR: CIMB Equities Research expects Gamuda and Taliworks to accept Pengurusan Air Selangor’s (Air Selangor) offer of RM2.6bil to take over water treatment concessionaire SPLASH.
Air Selangor, which is the state’s special purpose vehicle (SPV) for its consolidated water operations, had on Tuesday made two new offers to Gamuda and Taliworks pertaining to their existing operations and maintenance (O&M) contracts with SPLASH.
“Gamuda and Taliworks have until Aug 27 to accept or reject the offers. We believe both offers will be accepted as this will enable Gamuda and Taliworks to retain their O&M services in the state. The trade-off is less lucrative O&M terms than before, in our view,” it said on Thursday.
Gamuda owns a direct 80% stake in O&M company Gamuda Water (SSP3), while Taliworks owns a 100% stake in O&M company Sungai Harmoni (SSP1).
The offers stipulate that the two existing O&M contracts are terminated and migrated to new O&M terms still servicing the to-be-acquired SPLASH, but directly under Air Selangor’s consolidated operations.
CIMB Research said the offers also laid out the terms for the settlement of the receivables claimed by Gamuda Water and Sungai Harmoni against SPLASH, which has failed to fully pay its invoiced value to its O&M operators.
Recovery of receivables for both Gamuda Water and Sungai Harmoni is capped at 90%, implying a haircut of 10%.
Of the recoverable value, 10% will be paid upfront and the balance to be received staggered over nine years at 5.25% accrued interest.
Based on Gamuda Water’s guided RM700m receivables, a 10% haircut implies that it will recover RM630mil: RM63mil upfront plus RM567mil staggered over nine years (RM63m p.a. ex-accrued interest).
“The 10% discount to receivables implies a RM70mil potential impairment. Gamuda’s 80% share: RM56m (2.2 sen/share).
“In terms of revenue, the bulk supply rate (BSR) will be scaled down, equivalent to a 2 sen/m3 reduction from the existing undisclosed BSR.
“The new base-case BSR is 44 sen/m3 with periodic increases of 5%-13% over the next 11 years from 2019 to 2029,” it said.
CIMB Research said initial guidance is that Gamuda’s 80% share of Gamuda Water’s net profit will fall by 20%-36% to RM32mil to RM40mil per annum from FY7/19F.
This is on top of the estimated RM56mil impairment on account of Gamuda Water’s receivables haircut and the RM396mil impairment arising from 40%-owned SPLASH’s RM2.6bil takeover offer at a 28% discount to book value.
On the impact on Sungai Harmoni, which is 100%-owned by Taliworks, the new BSR to be scaled down by 5 sen/m3 but O&M tenure includes a seven-year extension from 2030 to 2036 on a higher BSR of 52.5 sen/m3, i.e. 19% increase from the current 44 sen/m3.
Based on the RM638mil receivables as at end-1Q18, a 10% haircut implies RM57mil upfront plus RM574mil staggered over nine years (RM57mil p.a. ex-accrued interest).
“Its initial guidance is that instead of an impairment arising from the 10% receivables haircut, Taliworks will write back up to RM186mil, being the accumulated provision for discounting on receivables as at end-1Q18 – though the quantum of the write-back may be impacted by the manner (haircut and/or staggered payment) in which the receivables are recovered, in our view,” it said.
CIMB Research was unable to ascertain the actual net earnings impact on Taliworks as a result of the BSR cuts, nor the actual quantum of the write-back at this juncture pending more details of the new O&M terms.
“The new O&M terms and sale of 40%-owned Splash are net negative for Gamuda in terms of earnings impact but positive in that it retains the O&M contract, though on less lucrative terms, in our view.
“New O&M terms (despite lower BSR) appear more net positive for Taliworks. Its O&M tenure is seven years longer while there is likely zero impairment risk to earnings as it is likely to be offset by the write-back in provisions,” it said.
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