AmWatch - Gamuda : One step closer to a water accord BUY, 13 July 2015

STOCK FOCUS OF THE DAY

Gamuda : One step closer to a water accord        BUY

We maintain BUY on Gamuda with an unchanged fair value of RM5.80/share, which is at a 10% discount to our NAV/share. The local press reported over the weekend that a supplemental water agreement has been signed between the Federal and Selangor governments. The accord represents an additional but vital part to the master agreement that was signed on 12 September last year.

Then, both the Federal and Selangor governments had signed the master agreement together with Pengurusan Aset Air Bhd (PAAB) and Pengurusan Air Selangor Sdn Bhd (Air Selangor) to restructure and consolidate water supply services in the state. Under the supplementary agreement, the restructuring of water concession companies can proceed without the Selangor government giving up its land while still being in compliance with the Water Services Industry Act. At the same time, the Selangor government will be able to consolidate the state’s water assets under one roof via Air Selangor.

The latest development validates our earlier conviction of a breakthrough in Selangor’s water impasse before Hari Raya. More importantly, the landmark deal will reignite fresh negotiations between Gamuda and both the Federal and Selangor governments for the disposal of the former’s 40%-owned SPLASH by year-end.

Gamuda’s water assets (i.e. SPLASH and Gamuda Water) currently account for c.RM1.5bil (RM0.59/share) or 9% of its NAV. While our preliminary estimates indicate that the disposal of its water assets could lead to a c.10% decline in FY17F earnings, we reckon the proceeds from the disposal can be redeployed towards more NAV-accretive deals (e.g. more landbanking moves) or to de-gear its balance sheet.  

We had earlier highlighted that a breakthrough in the water gridlock can be one of three event catalysts in 3Q15 that will under underpin share price performance. The other two are the Penang Transport Master Plan (PTMP) and Klang Valley MRT 2 Line (MRT2).

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