Gamuda splash deal off

GAMUDA BHD [ stock code 5398]
(Dec 2, RM2.78)
Maintain buy at RM2.75, fair value at RM4.05: Gamuda announced on Tuesday that the Selangor state government had informed the company that the state government was unable to proceed with the takeover offer of water assets of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash), due to the non-acceptance by both Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) and Puncak Niaga (M) Sdn Bhd of the Selangor state government’s revised offers.

Gamuda has a controlling 40% stake in Splash, while businessman Tan Sri Wan Azmi Wan Hamzah’s The Sweet Water Alliance and Selangor’s investment arm Kumpulan Darul Ehsan Bhd (KDEB) hold the balance of 30% each.

It was reported last month that the Selangor state government has given up on its consolidation plans after offering around RM9 billion to buy water assets of the four private water entities in Selangor back in June.

Back then, Splash had accepted the RM1.6 billion offer from the Selangor state government based on one-time book value of water assets (net of debt).

As a sweetener, the Selangor state government had also agreed to retain Gamuda Water Sdn Bhd as the operations and maintenance contractor for the Sungai Selangor water supply scheme phase 3 (SSP3). Gamuda, in turn, holds an 80% stake in Gamuda Water.
With the latest turn of events, the third offer by the Selangor state government for Splash had effectively lapsed on Nov 30, 2009. Instead, we now expect Splash and other water entities to negotiate directly with Pengurusan Aset Air Bhd (PAAB) on the potential disposal of their water assets.

The Selangor government had, under a revised offer in July, proposed to acquire Splash’s water assets and operations for an estimated gross price of RM2.97 billion comprising the assumption of RM1.39 billion in liabilities and RM1.58 billion in equity.

Protracted negotiations on Splash also mean that prospects of a potential special dividend by Gamuda may not materialise in the near term. Such a move would have enabled Gamuda to distribute up to 31 sen/share to its shareholders, on our estimates.

But we believe the latest development concerning Splash, coupled with earlier concerns over Vietnam and the Middle East, have already been priced in at current levels.
More importantly, we continue to remain upbeat on Gamuda for exposure to a re-acceleration of infrastructure spending, both domestic as well as abroad.
Maintain buy with a fair value of RM4.05/share, based on an unchanged 5% discount to its sum-of-parts (SOP) value. — AmResearch, Dec 2
This article appeared in The Edge Financial Daily, December 3, 2009.