Puncak - Still Struggling, No Catalsys Ahead

It is believed to be in line for a major government water project in 2018 which, if successful, might relieve some pressure for the struggling company.

According to a source close to the deal, the company is moving forward in discussions with government officials to clinch a non-revenue water (NRW) related project. Essentially, NRW is treated water that is lost in the distribution process (for example, through theft or leaking pipes) from the plants to consumers and end-users.

Talks between Puncak Niaga and the Ministry of Energy, Green Technology andWater are already at an advanced stage. It is believed the company is bidding for a major NRW project nationwide. The contract could involve several states in the peninsula.

However observers believe it could be tough for Puncak Niaga to land the project due to political factors. The water business is a politically sensitive matter, especially in opposition-led states like Selangor. The fact that this is election year (2018) could be a major stumbling block to get the deal done. If the NRW project involves Selangor, for example, the company’s legal action against the state could make things complicated.

In November 2017, Puncak Niaga filed a RM14 bil lawsuit related to Selangor’s takeover of its water assets in a restructuring exercise. The former concessionaire is citing abuse of power by the state government in the water restructuring which saw Puncak Niaga disposing of its highly-prized subsidiary Syarikat Bekalan Air Selangor (Syabas) in 2015 for RM1.55 bil.

Although it is not known how much the new project might be worth, NRW management can be a lucrative business, especially in states and countries where there are major water supply problems.

For example, Ranhill Holdings Bhd which runs its water concessionaire business in Johor is targeting to grow its NRW business to RM100 mil per annum. In general, the lower the NRW the better it is because it means that water is being more efficiently distributed.

Malaysia’s average NRW in 2014 was about 35% and the government is targeting to lower that figure to 25% by the year 2020. To achieve this, the National Water Services Commission (SPAN) estimates RM13 bil of capital investments in water distribution systems would be needed.

Puncak Niaga has been on a downward spiral in the last two years (Till end Dec 2017), especially since losing its water concessionaire business in Selangor in 2015. It was the company’s major revenue contributor and it has not been able to adequately replace it.

In the subsequent financial year 2016 (FY16) after the Syabas deal, Puncak Niaga posted a net loss of RM258.9 mil. As of the third quarter ended Sept 30 last year, its loss amounted to an estimated RM98 mil, bringing accumulated losses to over RM355 mil since the Syabas sale.

To make things worse, in 2017 the company cut its losses in China where it had several water-related projects and withdrew from the market completely. Its pullout from China was said to be mainly due to regulatory problems and difficulties in dealing with various state agencies there.

Other than its core water business, Puncak Niaga’s attempts to use the proceeds from the Syabas sale as a springboard to become a major oil-and-gas and plantation player have also fallen flat. Its O&G venture has practically stalled due to the crude oil price collapse in the past few years (Till mid June 2017).

Oil prices are still volatile (Till end Dec 2017) and Puncak Niaga suffered big losses in the sector. It remains to be seen whether the oil price rebound (Till Jan 2018) will lead to a reversal of fortunes in this sector for Puncak Niaga.

Although the company has purchased some oil palm land in East Malaysia, its plantation expansion has also suffered a similar fate and has not made any significant impact on the company’s revenue so far (end Dec 2017).

Even if its plantation acquisitions achieve positive revenue, it remains to be seen whether it will be good enough to turn around the company. A lot of the plantation land in Sarawak that it acquired is still vacant and will need time to yield results, so there are question marks as to when it can start contributing to Puncak Niaga’s revenue stream.

In July 2017 the company completed the purchase of Danum Sinar Sdn Bhd, an oil palm plantation company in Sarawak, for RM276.59 mil, a price 38% lower than originally proposed due to revaluation of the land. Danum Sinar has a total of 46,674ha of plantation land in Murum, Sarawak but the bulk of the land (or 33,372.6ha) is unplanted.

In October 2015, Puncak Niaga finally sold its water assets in Selangor – Puncak Niaga (M) Sdn Bhd and Syabas – to state-owned Pengurusan Air Selangor Sdn Bhd for RM1.56 bil after prolonged negotiations that lasted more than seven years.

The sale was a part of a consolidation process driven by the Selangor government, returning control over the water industry from the private concessionaires to the state agencies.

Selangor had privatised its water industry in 1994 with the state government taking charge of water supplywhile it delegated water production and distribution to private concessionaires.

At the moment, Splash remains the only concessionaire in Selangor that has not been taken over by the state. Due to differences in valuation, the two parties are still negotiating and have had several deadline extensions.

Prior to 1994, the Selangor water industry was fully managed by Jabatan Bekalan Air Selangor. After the opposition wrested control of Selangor in 2008, the state government rejected two tariff hikes (37% in 2009 and 25% in 2012) proposed by Syabas and began the drawn-out process of consolidating control of the water assets back into state hands.