Gamuda gets Splashed
Stock falls over 4% on Selangor government’s offer for water company
PETALING JAYA: Shares of Gamuda Bhd tumbled on worries that the company may have to settle for a lower valuation for its water assets.
The stock declined 16 sen or 4.12% to RM3.72 on a volume of 15.36 million shares.
UOB Kay Hian slashed its target price for Gamuda from RM4.49 to RM4.36 to reflect the absence of contribution from its water concession.
The Selangor state government has offered to buy out Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash), in which Gamuda is a shareholder, for RM2.55bil.
Gamuda, which is the largest shareholder in Splash, will decide on the offer by Friday.
The buyout offer, at 0.72 times book value, is slightly lower than Splash’s one times book value. Under the offer, Gamuda and other shareholders in Splash will receive the first tranche of proceeds worth RM760mil followed by annual payment of RM29mil a year for the next nine years.
“The company has guided in the past that cash proceeds from the potential disposal would be mainly distributed as special dividends, with the balance for working capital utilisation,” UOB Kay Hian said.
A local daily yesterday quoted sources that the one times book value was the ‘ideal’ valuation that Gamuda had wanted, and that the deal would likely be accepted by Gamuda in spite of the lower valuation.
The company has a 40% stake in Splash. Selangor state-owned Kumpulan Perangsang Selangor Bhd (KPS) has 30%, while the remainder is owned by Sweet Water SPV Sdn Bhd, which is a private vehicle of businessman Tan Sri Wan Azmi Wan Hamzah.
The report also quoted sources as saying that a possible incentive for Gamuda to accept the offer would be the continued appointment of Gamuda’s 80%-owned unit, Gamuda Water Sdn Bhd, as the operation and maintenance contractor for the SSP3 Water Treatment Plant.
The terms of the contract would also soon be renegotiated between the company and the state government, the report added.
CGSCIMB said that it believes the deal would go through and that Gamuda would receive a sizeable amount of cash.
“Gamuda will receive RM760mil upfront, the balance of RM260mil will be staggered over nine years. Sweet Water SPV will receive RM765mil upfront, the balance of RM195m will be staggered over nine years. KPS, meanwhile, will receive RM765mil upfront with the balance being staggered over nine years,” the research house said.
CGSCIMB further noted that there would be a potential earnings vacuum of RM97.4mil (40% associate share of Splash’s latest full-year net profit) after the buyout, and said that the 0.72 times book valuation for Splash would flag an impairment risk to its earnings.
“For Gamuda, we estimate that the forecast financial year 2019 (FY19) net profit could drop by 14%, excluding Splash’s net profit, while it could also be hit by up to RM396mil in impairments. Our back-of-the-envelope calculation shows that our normalised FY19 net profit could decline by as much as 69% to RM223mil,” it said.
CGSCIMB has maintained its “reduce” rating on Gamuda with a target price of RM3.10 and also its “neutral” rating on the water treatment and services industry as a whole.