Puncak Niaga drops 2.14% on news of no more extension to water agreement
KUALA LUMPUR (March 9): Shares of Punck Niaga Holdings Bhd ( Financial Dashboard)'s dropped 2.14% or 6 sen to RM2.74 at mid-day with 519,800 shares changing hands as the Selangor state government announced it would not grant Putrajaya a third extension on the Selangor water restructuring deal.
Selangor Menteri Besar Mohamed Azmin Ali has confirmed that no further extension would be granted for the agreement which lapsed today.
Puncak Niaga (fundamental:1.9; valuation: 2.4) has a market capitalisation of RM1.165 billion.
An analyst told theedgemarket.com that the drop in Puncak Niaga's share price was mainly driven by news of the likely lapse of the water restructuring master agreement.
The Edge Financial Daily in a report today, citing a source, had anticipated the decision saying it was unlikely that a third extension would be granted for the master agreement signed on Sept 12 last year to restructure the state’s water supply industry.
The source said Putrajaya had asked for another one-month extension to the master agreement until end of this month, but the state had disagreed.
But if the water talks collapse, the source said the agreements to acquire PNSB and Syabas were also expected to lapse as well.
PNSB manages a majority of the more than 30 water treatment plants in Selangor, while Syabas is responsible for managing the treated water distribution system.
(Notes: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)
Lets re-examine what the Puncak potential outcome after 9 Mar. I'm opine there are 3 possible scenario as below:
Scenario 1: Deal delay for 3rd time, extent by another 1 month
Impact: Share price remain weak, trade sideline as most of these uncertainty already price in the current depress price. Market generally dislike uncertainty, tend to discount stock fundamental. Prolong and uncertain over definite date for completion deal will likely prompt short term investor to cut, and discourage potential investor to buy.
It is however a testing time for value investor to either see these a opportunity to accumulate current depress share price and remain stronghold on these investment grade stock or view it as value trap, a opportunity time cost to swap to other more potential stock.
b.) Scenario 2: Deal call off, Puncak refuse to grant any further extension to Air Selangor and forfeit its earnest deposit.
impact: Knee jerk impact on Puncak share price, price react negatively but downside is limited. Puncak share price however will rebound back later as investor will realize that Puncak business direction is clearer now, it will remain as water concession holder
Puncak retain its lucrative water concession, remain control over 45% capacity of state total treated water supply (PNSB) + 70% control of total water supply distribution (Syabas). It will ensure Puncak continue to deliver steady profit over its entire concession period.
Puncak also can capitalize on both Fed and State gov recognition over its outstanding receivables and liabilities in the take over offer document and legal SPA signed, as both gov willing to absorb all Puncak outstanding receivables and liabilities. Despite deal call off, it offer Puncak strong valid reason to win over current ongoing legal case against state gov for its illegal refusal to grant water traffic hike as per concession agreement, resultant Puncak incur such high outstanding receivables and liabilities. If puncak win the legal case, state need to compensate Puncak and its balance sheet will clear and clean from debt laden to cash rich.
Both State and Fed gov also in future cannot force Puncak to surrender its water concession or use Wasia to forcefully take over water assets operation anymore. The reason for take over failed, is not because Puncak unwillingness to sell and give up it core lucrative water concession, but it is solely due to conflict between state and fed gov over future water assets ownership and leaseback agreement.
c.) Scenario 3: Deal is finally seal, Puncak stand to received RM 1.555 billion from Air Selangor, boosting Puncak cash hoard to more than RM 2 billion. Shareholder stand to reward with special dividend at least RM 1/share.
Impact: Share price will play catch up to reflect upcoming special dividend. Ex-dividend, however, Puncak direction depend on ability of management to acquire earning accretive assets to fill up earning gap left by water concession disposal.
Based on Puncak latest Q4 result, water concession contribute profit RM 66.5m, whereas, its oil and gas + construction earn RM 29.9m, therefore, without water concession, Puncak EPS will be slump from 20sen/quarter to just 7 sen/quarter. However, Puncak after payout special dividend, still retain cash hoard more than RM 1.5 billion, even without any assets acquisition, just base on interest deposit 4%, Puncak could earn about RM 15m/quarterly interest income, partially fill up the gap earning. Hence, ex-disposal, ex-dividend and on fully diluted basis, Puncak quarterly earning still can deliver about RM 45m, give rise to 8.5sen, or annualized EPS at 34sen. If peg Puncak to in par with average oil and gas sector/construction sector of PE 8x, Puncak fair value should be at RM 2.70. Remark: Investor here is free to exercise own discretion investment decisions. It is FREE market, anymore have right to decide, bear own risk and enjoy own rewards