‘Gamuda should accept Splash offer’

> However, analysts say accepting it will lead to a cut in earnings forecast and target price for the group

PETALING JAYA: Despite the lower than expected valuation, Gamuda Bhd should consider accepting the latest offer from the Selangor government for Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) as it is more reasonable compared with the previous offers, according to analysts.

Kenanga Research expected an offer price of RM3.1 billion to RM3.5 billion, which represents 0.9 to 1.0 times its book value. This compares with the offer price of RM2.55 billion from Air Selangor last Friday, representing a 26% discount to Splash’s net book value of RM3.5 billion as of December 2017.

Gamuda and Kumpulan Perangsang Selangor Bhd shares reacted negatively to the Splash offer, declining as much as 5.4% and 6.3% to RM3.67 and RM1.78 respectively yesterday. At market close, the stocks fell 4.1% and 5.8% to RM3.72 and RM1.79.

Kenanga Research said the decision to take up the offer should also take into account Splash’s ballooning receivables that is long overdue, especially when the current offer is much more reasonable compared with the previous one.

“If the deal goes through, we can expect net gearing of 0.55 times as of Q3’18 to come off to 0.42 times. However, we believe that the possibility for a special dividend is slim as management might conserve cash for future projects.”

AmInvestment Bank believes Gamuda will accept the offer as it realises that the water production concession held by Splash is no longer sustainable.

“This is because water distributor Syabas, the sole offtaker for the treated water it produces, has not been able to settle the amounts billed by Splash due to its inability to raise tariffs despite rising costs (including the bulk water supply rate). Syabas also has not been able to embark on initiatives to reduce nonrevenue water due to the lack of funding.” AmInvestment Bank has cut Gamuda’s FY18-FY19 earnings forecasts by 11% each to reflect the share of profits foregone from its 40% stake in Splash, partially mitigated by interest savings from the RM1.02 billion disposal proceeds.

It also trimmed Gamuda’s fair value by 3% to RM3.36 from RM3.58, but maintained a “hold” call.

Kenanga Research is keeping an “outperform” call on Gamuda with an unchanged target price of RM4.35, but it will be lowered to RM4.30 should Gamuda choose to accept the offer.

It said the decision to accept the offer will also have a negative impact on Gamuda’s FY19 earnings due to incurring losses of over RM300 million from the disposal (excluding loss of future income from Splash) coupled with RM100 million of core earnings contribution from Splash.