Still in the pipeline
NOT all water pipe makers will be making an immediate splash, contrary to recent speculation that such companies are going to gain from the expected Selangor water restructuring exercise.
Sources say because of the potential delay in the state’s water restructuring exercise, Pengurusan Air Selangor Sdn Bhd (Air Selangor), which is the state’s water assets operator, would not be able to dish out new contracts that the pipe makers have been eyeing over the past several years.
Without any additional funding from the Government, the minimal funding from the state government or internally generated funds from Air Selangor would be insufficient to fund the entire upgrading of Selangor’s water infrastructure.
“For the pipe makers, this is the same angle as before. They are reliant on Selangor’s water restructuring because other projects are scarce and the slice of the pie is not that large.
“Once Air Selangor gets the funding, only then will the lucrative contracts be given out,” says a source.
The main issue is that of timing. Air Selangor needs to obtain an operating license from National Water Services Commission (SPAN) before it can submit its three-year capital expenditure plan.
The plan will outline exactly how much is needed to undertake crucial pipe reparation and upgrading works. The federal government will then release funds on a progressive basis once it is approved.
The elephant in the room is Air Selangor’s much delayed acquisition of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash). Air Selangor’s CEO Suhaimi Kamaralzaman recently said that he remains optimistic of acquiring Splash by year end.
However, there are no details as to how it is going to meet Splash’s valuations given that it has limited funds to undertake the acquisition. Under the previous master agreement, a sum of RM250mil is allocated for the deal, which is said said to be about a tenth of the book value of Splash.
“The entire process is expected to take many months. Getting additional funding from the government to take over Splash will add up to the delay as the cash injections could be separate from Air Selangor’s business plan. All this will likely result in a lengthy delay until the company secures new funds needed to give out contracts,” the source adds.
According to previous analyst estimates, capital investments for the replacement and repair works of water pipes in Selangor could amount to an estimated RM1bil.
Apart from Selangor’s water restructuring exercise, the next largest project for pipe makers to get excited about would be the development of Langat 2 water treatment plant project.
In terms of contract size, the Langat 2 pie is smaller, compared with Selangor’s 34 water treatment plants that are currently under Air Selangor’s management.
The replacement and repair works are vital in addressing the state’s high non-revenue water (NRW) issue.
According to Air Selangor’s recent performance report, Selangor’s average NRW in 2015 was an estimated 1.5 million cubic metres a day or 32%, equivalent to 2011 figures.
The government aims to realise the 25% NRW target by 2025.
Besides that, most of Selangor and Kuala Lumpur’s water pipes are more than 30 years old.
An estimated 49% of pipes are mild steel, 23% asbestos cement, 13% Unplasticised Polyvinyl Chloride (uPVC) and 15% a mixture of various types of pipes.
On average, about 211 of these pipes leak or burst daily, usually from old asbestos pipes. These asbestos cement pipes need to be replaced as soon as possible.
This translates to 6,293km or about a fifth of the total length of water pipes in Selangor.
Air Selangor has allocated RM50mil for the replacement of 59 km of the most frequently leaked or burst pipe areas in 2016 and 2017.
Of the four largest water pipe manufacturers, Engtex Group Bhd, Jaks Resources Bhd and Hiap Teck Venture Bhd produce mild steel pipes.
Engtex and Jaks Resources are the two large diameter mild steel pipe manufacturers in Malaysia.
The larger diameter mild steel pipes, measuring up to 2,600mm, are used for raw water pipelines. In other words, it is used to transport water from reservoirs to the water treatment plants.
The supply of larger diameter mild steel pipes are limited to the number of reservoirs and water treatment plants in the country.
Meanwhile, the smaller-diameter pipes are used to distribute potable water to consumers.
According to a Maybank Investment Bank research report, the small or medium-sized mild steel pipe market is competitive, with around 18 public-listed and private companies.
Engtex and YLI Holdings Bhd are manufacturers of ductile iron pipes, which tend to be smaller in diameter compared to mild steel pipes.
The upgrading of Selangor’s water infrastructure is expected to create more demand for smaller-diameter pipes which will benefit water pipe manufacturers,
However, there is also the issue of stiff competition among the pipemakers in a market that already has razor thin margins. Note that there is also the threat of imported pipes undercutting local players, which could potentially dent their earnings.
So, until Air Selangor sorts out its licensing and funding issues, water pipe makers will have to wait to make a splash again.