Supply rate cut to hit revenue of Gamuda Water

PETALING JAYA: The quantum of reduction for Syarikat Pengeluar Air Sungai Selangor Sdn Bhd’s (Splash) bulk supply rate (BSR) would likely result in lower revenue terms for Gamuda Bhd’s 80%-owned Gamuda Water Sdn Bhd.
Last Friday, Pengurusan Air Selangor Sdn Bhd (Air Selangor) said in a statement that the cost of treated water paid by Syabas (water distributor) to Splash (water treatment plant) will be reduced before water is distributed and charged to households and industrials.
Air Selangor targets to reduce Splash’s BSR from RM1.37 per cubic metre to 42-44 sen per cubic metre, which is a significant reduction of 67.9% to 69.3%.
“Based on our preliminary analysis, the BSR cut points to a less favourable post-restructuring revenue parameter for Gamuda Water, which currently holds an operations and maintenance (O&M) contract with Splash. We believe a significantly lower restructured BSR for Splash will trickle down to Gamuda Water in the form of lower revenue too,” said CGS-CIMB.
It said in its research report today that Gamuda Water’s RM40-50 million net profit contribution to Gamuda (at 80% stake) should therefore be similarly reduced, even if the O&M contract is retained under Air Selangor’s new terms.
CGS-CIMB said the news of a BSR reduction is a negative surprise, as it suggests less lucrative post-restructuring O&M contracts.
“We retain our net profit forecasts for Gamuda pending likely further details for the O&M terms ahead of the signing of the sale and purchase agreement on Sept 14,” it added.
The lower BSR, however, is expected to reduce the operating cost and have a positive impact on the operational efficiency of Air Selangor.
CGS -CIMB said once the acquisition is concluded, bonds and loans owed by the four water concession companies totalling in excess of RM8 billion will be taken over by Pengurusan Aset Air Bhd (PAAB) and restructured into a long-term lease rental.
Water-related loans extended by the federal government to the Selangor state government exceeding RM1.1 billion, will also be restructured into long-term lease rental.
“With the acquisition of Splash and the conclusion of the Selangor water industry restructuring, Air Selangor will have access to attractive funding terms from PAAB for its future capex projects. The terms of funding under PAAB are better than commercial funding, with lease payments made over 45 years at affordable lease rates,” said CGS-CIMB.
Selangor will also gain access to funding for projects relating to water resource, such as dams, which will be provided by the federal government in the form of grants.
CGS-CIMB has a “reduce” rating on Gamuda, with a target price of RM3.10. It also has a “reduce” rating on Salcon Bhd with a target price of 28 sen and “hold” rating on Taliworks Corp Bhd with a target price of 91 sen.
Although it is not a beneficiary of the Splash sale, Salcon may benefit from the pick-up in non-revenue water works relating to Selangor’s Old Water Pipe Replacement Programme following the full consolidation of water operations under Air Selangor.
Taliworks also could recover the RM638 million in accumulated receivables as at end of 1Q18 owed by Splash to the group’s O&M company.
“This is highly likely to be executed on a staggered basis rather than lump sum. Meanwhile, its O&M contract with Splash is likely to be renegotiated too,” said CGS-CIMB.
Taliworks’ wholly owned subsidiary Sungai Harmoni Sdn Bhd, contributed 13.6% of Taliworks’ FY16 net profit.