Puncak Niaga received a RM5.6bn offer from KDEB to take over 100% of PNSB and a 70%  of  Syabas.  Evaluating  the  offers  is  not  easy  -  information  is  limited  and  the offer  letters  contain  ambiguous  terms  and  conditions.  As  our  back-of-envelope calculations are based on certain assumptions and derives a wide range of potential offer amounts (from -RM4bn to RM5.6bn), we will not speculate on the price tag for now. We also rule out the possibility of any deal being concluded as the polls near. The stock is still a Trading BUY with the FV still at RM2.08, due to its undemanding valuation, rising O&G contributions and buoyant investor sentiment.

RM5.6bn offer. Yesterday, Puncak Niaga announced the indicative terms and conditions of KDEB's proposal  to  acquire  a  100%  stake  in  Puncak  Niaga  SB  (PNSB)  and  70%  of Syarikat  Bekalan  Air  Selangor  (Syabas).  The  preliminary  offer  for  PNSB  amounts  to RM2.48bn, of which RM1.12bn is the value of equity plus return on equity at 12% p.a. while remaining RM1.36bn is the value assumed for the water assets. Separately, KDEB valued the  70%  stake  in  Syabas  at  RM3.12bn,  in  which  the  equity  value  plus  return  on  equity  at 12% p.a. came to RM437.8m whilst the pro rata share of water assets to be assumed is at RM2.68bn.  That  said,  a  major  chunk  of  the  RM9.65bn  offer  to  four  water  concession companies goes to PNSB and Syabas, at a total combined value of RM5.6bn.

Difficult  to  assess  the  offers.  Despite  the  price  tag  for  PNSB  and  Syabas  being  made known, we find it tricky evaluating both offers since that no specifics were mentioned about the  way  to  derive  actual  cash  value  offered  for  both  the companies. We  are  unsure  if  the total  value  of  the  company  or  equity  contribution  plus  return  on  equity  at  12%  p.a. mentioned in the offer letter is the final cash value to be paid to Puncak Niaga for its equity stake in both companies. Other issues are over the outstanding liabilities in the respective company  that  the  offer  letter  mentioned  would  be  assumed  by  KDEB.  We  may  need  to deduct the gross or net debt position from the total value or equity value stated in the offers, in order to gauge the possible price tag. We are also short on details pertaining to the gross and  net  debt  positions  of  PNSB  and  Syabas  respectively,  but  decided  to  assume  the consolidated number reported as at 30 Sept 2012 being the combined borrowings and cash positions  of  the  two  units  to  ease  our  hypothesis  calculation.  Based  on  the  limited information,  we  derived  such  a  wide  range  of  values  (from  -RM4bn  to  RM5.6bn)  as  the possible cash offer for the units and thus, prefer not to speculate on the potential final price tag at this juncture. 

No  immediate  deal  in  sight.  The  offer  price  aside,  we  would  like  to  reiterate  that  the timing  of  the  offer  could  be  better.  Meanwhile,  we  retain  the  view  that  the  proposed acquisitions will likely be affected by various uncertainties given the fact that the polls could be  called  anytime  in  the  next  few  weeks  and  this  type  of  M&A  could  take  months  to complete.  As  KDEB  is  an  investment arm of the state of Selangor's  administration,  the impending  dissolution  of  the  Selangor  State  Assembly  may  cause  confusion  as  to  the ultimate  decision  maker  of  this  exercise.  Undeniably,  KDEB  has  its  own  professional management  but  we  believe  these  type  of  transactions  will  need  the  blessings  of  the Menteri Besar and, possibly, the approval of the State Assembly.

Two  weeks  to  accept  the  offers.  Puncak Niaga said the board and management of the company will review the respective offers before replying to KDEB. The deadline stipulated in KDEB's letters dated 20 Feb 2013 is that Puncak Niaga needs to give its decision by 6 March  2013  or  any  such  other  extended  or  revised  closing  date  that  may  be  decided  by KDEB. Meanwhile, Malaysiakini said SPLASH will meet the  State Government next  week to get more details on the takeover offer. We suspect Puncak Niaga also may need to seek further  clarification  from  the  state  government,  especially  since  the  offer  letter  lacks  important details, before the board can make its preliminary decision.

Reiterate  TRADING  BUY.  While  we  continue  to  think  there  will  be  no  immediate  deal  in sight from KDEB's latest offers, we think any offer will serve to warm investors up to Puncak  Niaga.  We  also  focus  on  the  company's  undemanding  valuation  although  we acknowledge that the major improvements to the company's bottomline of late were mainly attributed to the compensation for the non-implementation of higher water tariffs, which is currently  only  in  the  books  and  will  not  involve  any  physical  cash  inflow  until  the  court delivers  its  judgment.  Nonetheless,  the  improvement  in  its  P&L  is  indeed  another sentiment booster. In addition, the group's successful move into the lucrative O&G field on top  of  its  rural  water  supply  projects  are  also  sufficient  reasons  for  investors  to  cheer. Therefore,  we  are  maintaining  our  TRADING  BUY recommendation, with the stock's fair value kept at RM2.08. This implies a mere 3x forward FY12 EPS. 

Source: OSK