CIMB: Cut in Splash’s cost of treated water is ‘negative surprise’

PETALING JAYA: The quantum of reduction in the cost of treated water for Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) post-acquisition by the Selangor state government is a “negative surprise”, according to CIMB Research.

The research house said that the Splash’s cost of treated water or bulk supply rate (BSR) will be cut by almost 67.9% to 69.3%, and this could lead towards less lucrative post-restructuring operations and maintenance (O&M) contracts.

Air Selangor, a special purpose vehicle of the Selangor state government, plans to reduce Splash’s BSR from RM1.37 per cubic metre to 42 sen to 44 sen per cubic metre.

The reduction in BSR is intended to remedy the revenue deficit of Selangor’s water distributor Syarikat Bekalan Air Selangor Sdn Bhd (Syabas).

Following the downward revision of the BSR, CIMB Research said that the existing O&M contract of Gamuda Water with Splash will also be renegotiated at less favourable terms.

Gamuda Water is 80%-owned by conglomerate Gamuda Bhd.

“We believe a significantly lower restructured BSR for Splash will trickle down to Gamuda Water in the form of lower revenue too.

“Gamuda Water’s RM40mil to RM50mil net profit contribution to Gamuda should therefore be similarly reduced, even if the O&M contract is retained under Air Selangor’s new terms.

We retain our net profit forecasts for Gamuda pending likely further details for the O&M terms ahead of the signing of the salesand-purchase agreement on Sept 14.

“Impact is unknown for Taliworks Corp Bhd’s O&M. Sungai Harmoni (O&M service provider) made up 13.6% of Taliworks’s FY16 net profit in the financial year of 2016,” stated CIMB Research in a note.

Given the recent developments, the research firm has reiterated its “neutral” stance on the water treatment and services industry.