By Khairul Khalid
The recent collapse of the water deal between Selangor and Putrajaya stalled Puncak Niaga’s RM1.5 billion sale of its water assets. Are the company’s expansion plans also now in jeopardy?
Business model: Puncak Niaga Holdings Berhad is an investment holding company that was established in 1997 and was listed on Bursa Malaysia in the same year. It was the first water concessionaire to be listed on the Bursa.
The company’s core business is currently the water sector, although it also has plans to expand in other sectors such as plantation and oil & gas.
Puncak Niaga was awarded water treatment and supply concessions by the Selangor state in 1994. It owns two of Selangor’s four private water concessionaires – Puncak Niaga Sdn Bhd (PNSB) and Syabas (Syarikat Bekalan Air Selangor).
Puncak Niaga operates, manages and maintains 29 water treatment plants with a combined capacity of 1,930 million litres per day.
Syabas supplies treated water to 7.5 million people in Selangor, Kuala Lumpur (KL) and Putrajaya.
It also undertakes the maintenance of 26,958 kilometres of water pipes, 1,536 service reservoirs, elevated water tanks and suction tanks and 619 booster pumping stations within Selangor and KL. Additionally, Puncak Niaga has water projects in other Asian countries such as China, India and Myanmar.
In a recent development, Puncak Niaga’s long awaited RM1.5 billion sale of its water assets has been temporarily halted due to the Selangor-Putrajaya standoff and collapse of the entire water deal.
Puncak Niaga’s directors have agreed to grant Selangor’s Pengurusan Air Selangor Sdn Bhd (Air Selangor) a one-month extension until April 9.
The sale entailed the disposal of Puncak Niaga’s 100% stake in PNSB and 70% stake in Syabas to Selangor state agency Pengurusan Air Selangor Sdn Bhd.
The RM1.5 billion deal was agreed in principle last year and finally approved by Puncak Niaga’s shareholders last January. The sale is a key component in the prolonged water restructuring dispute between the opposition led Selangor state and Putrajaya.
A few weeks ago, the state abruptly cancelled the entire water deal, claiming that the federal government had violated the master agreement.
At the time of writing, the Selangor Menteri Besar (MB) Azmin Ali and his team remain locked in negotiations with the federal government, led by Kettha (Ministry of energy, green technology and water) minister Maximus Ongkili, to revive the water agreement.
There has been no indication by either party how long these negotiations will take although both parties maintain that it can be resolved.
Azmin rejected Putrajaya’s request for another extension to finalise the deal. Both parties cited disagreements over land matters linked with the 26,000 km of pipes belonging to the water concessionaires.
The MB claimed that Putrajaya wanted “free land” and this would jeopardise the sovereignty of Selangor.
Both parties claim some misinterpretation of the original agreement inked last year between Putrajaya and former MB Abdul Khalid Ibrahim.
The Selangor government, under the opposition’s Pakatan Rakyat (PR), has been trying to take control of the state’s water assets since it took over in 2008, often without success due to differences in valuation.
In February last year, the federal and state governments signed a MoU (memorandum of agreement) to speed up water negotiations with the concessionaires, that eventually led to the RM1.5 billion deal between Selangor and Puncak Niaga.
Shareholders and management: Major shareholder of Puncak Niaga is the company’s executive chairman Rozali Ismail with a 40.9% stake, followed by Lembaga Tabung Haji with 9.8%, Employees Provident Fund (EPF) with 5% and Great Eastern with 4.9%.
Share performance: Puncak Niaga’s share price has fallen 25% since the water assets sale to Selangor state was signed last November.
Back then, it was trading between the range of RM3.40 – RM3.60.
The stock plummeted to as low as RM2.30 last December, although it has picked up since then.
Puncak Niaga was trading RM2.73 at closing bell yesterday, up 5 sen.
What analysts think: AmResearch analysts has maintained its “hold” recommendation on Puncak Niaga shares, despite the recent impasse in negotiations between Selangor and Putrajaya.
“We believe an amicable solution could still be achieved as both governments may meet to resolve the water impasse. Any further delays in the water deal would jeopardise sustainability of water supply in the state,” said AmResearch.
Puncak Niaga’s executive chairman Rozali has also warned that the unresolved water issue will delay a number of projects, including the RM9 billion Langat 2 water project.
According to AmResearch, currently three out of the eight conditions in the master agreement signed last September are not resolved.
Firstly, the transfer of assets and land to Pengurusan Aset Air Bhd (PAAB) in return for RM1.68 billion cash and assumption of liabilities.
Secondly, application of facility licence from the regulator. Ongkili claimed that these should not apply to water assets in the Federal Territory and Putrajaya – particularly Bukit Nenas, Semenyih and Wangsa Maju WTPs (water treatment plants)– as these belong to the federal government.
Thirdly, a submission of a financial model by Pengurusan Air Selangor Sdn Bhd (PASSB).
“As it is, the dispute currently centres on the transfer of ownership of land involving 26,000km of pipes in the state. Azmin said that the land is not part of the agreement and will result in Selangor giving up sovereignty of its land.
On the other hand, the federal government said that the land is only to be leased for 45 years, and is meant as collateral (for the RM2billion cash it extended to PASSB to complete the restructuring exercise). Also, the Bukit Nenas and Semenyih WTPs should not be considered collateral as they are federal owned,” said AmResearch.
Puncak Niaga’s announcement of dividends from the RM1.5 billion deal took many by surprise. Puncak has estimated a net disposal gain of RM415 million from the transaction.
Puncak Niaga has announced that out of the RM1.5 billion proceeds, RM534 million will be distributed to shareholders as cash dividends.
Puncak Niaga has stated that after disposing its water assets in Selangor, it plans to expand its existing oil & gas and construction businesses, as well as growing its water business to other parts of the region.
Analysts from RHB are more pessimistic about the Selangor water impasse and has downgraded Puncak Niaga to a “neutral” recommendation.
“This latest twist of events is a major negative surprise to us. We are disappointed that, after seven years of negotiations, things could go back to square one should the federal government and the Selangor state government fail to reach an amicable solution.
“We now peg a 35% discount to our valuation to reflect the increasing likelihood that there will be further delays on the negotiations,” said RHB.
Earnings forecast:
StockStalk: The collapse of the master agreement in the water consolidation between Selangor and Putrajaya has put a big spanner in the works of Puncak Niaga’s RM1.5 billion sale of its water assets to Selangor.
Apart from an indefinite delay in the whole water restructuring exercise, Puncak Niaga’s forays into other business ventures may also be in doubt.
RM1 billion from the proceeds of the water assets disposal was already earmarked for expansion of Puncak Niaga’s future beyond Selangor’s water industry.
Rozali has repeatedly stated his intentions to see Puncak Niaga emerge as a major player in the oil & gas and plantation sectors, while reiterating that the water engineering business would remain an essential part of the group’s business.
“I have the settlers’ blood in me as I grew up in a Felda settlement. So I wish to be involved in the plantation business,” he said after the company’s last annual general meeting.
Now that Selangor and Putrajaya are at loggerheads again over the master agreement of the water deal, there is the distinct possibility of another lengthy battle between state and federal governments.
Consequently, Puncak Niaga’s future business expansions may also be in limbo.
Shareholders face a potentially long wait, depending on how fast Selangor and Putrajaya resolve their differences, before Puncak Niaga’s long term diversification plans can be considered. As for prospective investors, uncertainty is the biggest factor to contend with before even looking at Puncak Niaga’s expansion plans.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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