Water sector: Neutral, re-rating possible

MIDF Research maintains a "neutral" view on the water sector but does not discount a re-rating once a clearer picture emerges from the water sector.

It was referring to Gamuda Bhd's (5398) water concessionaire Syarikat Pengeluar Air Sungai Selangor Sdn Bhd's (Splash) latest deal in seeking a 30-year concession as the operator of Selangor water assets starting in 2010.

"The prolonged saga to restructure the sector is coming to its second year and we continue to remain sceptical that Puncak Niaga would want to accept this offer," it said in a report.

MIDF said that consolidation was needed in the sector and will be supported by interest on water infrastructure projects.
"As for Puncak Niaga (Call: Buy; target price: RM3.55), we expect interest in the counter to remain favourable with a general expectation of them rejecting the offer made by Splash," it added.

MIDF maintained a "buy" call on Gamuda, with a target price of RM3.30 per share, a 12 per cent potential upside from the current level.

"We do not see any impact on earnings in 2010 as the offer to the Selangor state and federal governments is still in the early stages," it said.

Splash, 40 per cent owned by Gamuda, has made a bid to take over all related water concessionaires in Selangor for RM10.75 billion. Its other shareholders are the Sweet Water Alliance, with a 30 per cent stake, and Selangor government investment arm Kumpulan Darul Ehsan (30 per cent stake).

If the takeover materialises, Splash will be in-charge of the O&M operations of all water plants, which include the operations of the water distributors.

There are four water concessionaires in Selangor including Splash and Puncak Niaga. Others are Syabas and Konsortium Abass Sdn Bhd.