IN a press statement released on Tuesday, the Selangor state government said it would be ready to resume its quest to drive the restructuring of Selangor’s fragmented water industry.

This was in response to earlier press reports indicating that the federal government would allow the state government to con-tinue with its negotiations to takeover private water entities in Selangor.

The Selangor state government has also proposed that former Minister of Energy, Water and Communications Minis-ter Tun Dr Lim Keng Yaik spearhead negotiations on behalf of the federal government.

If true, we view this latest development in a positive light.

Lim was instrumental in formulating the new water framework, and is a suitable candidate to bring all parties to the negotiation table and spearhead consolidation talks.

This may lead to renewed or fresh offers by the Selangor state government, after its earlier offer of up to RM5.7 billion to takeover the four private water entities in the state fell through on Feb 20. More importantly, news flow momentum on the water sector is gaining traction.

In a cabinet reshuffle last week, Datuk Peter Chin Fah Kui was appointed to head the ministry, which is now known as the Energy, Green Technology and Water Ministry.

We do not think this change of guard would derail the proposed restructuring of Malaysia’s water industry.

In any case, a resolution to this deadlock is crucial to avert Syabas’ proposed water tariff hike of up to 37 per cent.

The tariff hike is pending a review by Malaysia’s cabinet after it was postponed by up to three months from its earlier deadline of Jan 1 this year.

We understand that Syabas would be entitled to compensation amounting to RM38 million per month (or RM456 million per year) if water rates were not to be raised.

This follows an earlier decision by the federal government in 2006 to honour Syabas’ first scheduled tariff hike of 15 per cent although it was delayed by up to 10 months (until October 2006).

We maintain our NEUTRAL weighting on the water sector. We believe that the one times book value used by the federal government backed Pengurusan Asset Air Bhd (PAAB) in acquiring the water assets of SAJ Holdings will continue to serve as an acquisition yardstick in valuing the private water entities in Selangor.

Nevertheless, we reckon that the loss of future concession revenue should be somewhat compensated by recurring cash flows from Operations and Maintenance (O&M) contracts as evident from the recent deal in Johor.

Stock-wise, we re-iterate our BUY rating on Puncak Niaga Holdings Bhd (Puncak) as a potential takeover play.

Puncak is central to the Selangor state government’s plans to merge the various water entities in the state under a holistic structure.

Any renewed interest by the state government could help Puncak realise the deep embedded value of its water assets.

Our fair value for Puncak remains unchanged at RM4.05 per share – based on a 10 per cent discount to our breakup value of RM4.50 per share.

Pending more concrete developments, we may have to review our fair value and recommendation on Kumpulan Perangsang Selangor Bhd (KPS).

The next leg for KPS will come from any state-led consolidation of Selangor’s water industry and potential O&M contract for Langat 2.