PP 7767/09/2010(025354)

25 March 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
25 March 2010
MARKET DATELINE

Infrastructure Recom : Neutral

(Maintained)
SPLASH Offers To Acquire Water Assets In Selangor

Table 1 : Infrastructure Sector Valuations

Price Fair EPS EPS growth PER P/NTA P/CF GDY
FYE Value (sen) (%) (x) (x) (x) (%) Rec
RM/s RM/s FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
PLUS Dec 3.43 4.13 23.6 36.3 -0.3 53.5 14.5 9.5 2.8 8.8 5.2 OP
Puncak Dec 2.48 2.55 31.1 28.8 -10.4 -7.4 8.0 8.6 0.7 2.3 2.4 UP
Sector Avg -1.4 48.2 13.9 9.4

♦ SPLASH to acquire Selangor water assets. Syarikat Pengeluar Air Chart 1: PE Band For PLUS

Sungai Sdn Bhd (SPLASH) has offered to take over the water assets in
Selangor state, consisting of three water treatment operators (SPLASH, PER = 15x
PER = 13x
PNSB and Abass) and water distributor Syarikat Bekalan Air Selangor PER = 11x
(Syabas, a 70% subsidiary of Puncak) for a total sum of RM10.75bn.

♦ SPLASH unlikely to succeed. We believe that this is unlikely to go

through, as:

1. The proposed acquisition by SPLASH defeats the purpose of the

Government initiated water sector restructuring, i.e. to house all water
Chart 2. PE Band For Puncak
assets in Peninsular Malaysia and Labuan under the Federal
Government; and
PER = 25x
2. A big question mark arises as to SPLASH’s ability to raise enough PER = 20x
PER = 15x
funding to finance the proposed acquisition; and

3. Puncak is likely to reject the offer. This is mainly because the

combined effective offer price for Puncak’s 100% stake in PNSB and
70% stake in Syabas is worth only RM1.2bn, having adjusted for net
debt, which is lower than our DCF-derived NPV.

♦ 37% water tariff hike unlikely to come forth. The latest development
aside, We continue to believe that the scheduled 37% water tariff hike is
unlikely to happen anytime soon, as such unpopulist move is out of the
Government’s agenda under the current political situation.

♦ Risks. The risks for Puncak include: (1) Compensation arising from
delayed 37% scheduled tariff 37% is paid; (2) 37% scheduled tariff hike is
granted; (3) Lower-than-expected variable costs, in particular chemical
costs; and (4) Water sector restructuring completes earlier thanexpected.

♦ Investment case. We reiterate our cautious view on the water sub-sector

as we believe that the water sector consolidation in Selangor is unlikely to
materialise in the near term. We are lowering our indicative fair value for
Puncak by 13.6% from RM2.95 to RM2.55, at 30% discount to its revised
DCF-derived NPV of RM3.65 (based on higher WACC of 11.5% vis-à-vis
10.9% previously to reflect its higher beta). Hence, our rating for Puncak is Chye Wen Fei
downgraded from Market Perform to Underperform. Maintain Neutral on (603) 92802172
the overall infrastructure sector. chye.wen.fei@rhb.com.my

Please read important disclosures at the end of this report.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 1 of 3
available for download from www.rhbinvest.com
 25 March 2010

♦ SPLASH to acquire Selangor water assets. Syarikat Pengeluar Air Sungai Sdn Bhd (SPLASH, a 40%
associate of Gamuda) has offered to take over the water assets in Selangor state, consisting of three water
treatment operators (SPLASH, PNSB and Abass) and water distributor Syarikat Bekalan Air Selangor (Syabas, a
70% subsidiary of Puncak) for a total sum of RM10.75bn (see Table 2).

Table 2: Details on SPLASH’s Offer Price

SPLASH PNSB Syabas Abass Total
(RM’000) (RM’000) (RM’000) (RM’000) (RM’000)
Selangor’s offer in Jul 09 2,975 1,936 3,361 946 9,218
Proposed additional by SPLASH 0 0 782 0 782
SPLASH’s offer 2,975 1,936 4,143 946 10,000
Compensation to SPLASH’s O&M 750 0 0 0 750
operators
SPLASH’s total offer 3,725 1,936 4,143 946 10,750
Source: Gamuda

♦ Other key terms of Splash’s offer are:

1. It will forego the outstanding 37% tariff hike, replacing it with a 2-3% annual increase or 9% for every three
years;

2. It will be solely in charge of the O&M of water production and distribution;

3. It will require a 30-year concession commencing 2010; and

4. It will inherit the existing non-revenue water (NRW) reduction targets of Syabas, i.e. 29%, 25%, 23%,
21%, 19%, 17% and 15% in 2010-2016

♦ SPLASH unlikely to succeed. We believe that this is unlikely to go through, as:

1. The proposed acquisition by SPLASH defeats the purpose of the Government initiated water sector
restructuring, i.e. to house all water assets in Peninsular Malaysia and Labuan under the Federal
Government (via Pengurusan Aset Air Bhd, PAAB) to improve efficiency and resolve the issue on future
heavy capex that is unsustainable under the current model;

2. A big question mark arises as to SPLASH’s ability to raise enough funding to finance the proposed
acquisition; and

3. Puncak is likely to reject the offer (despite the new offer being higher than Selangor government’s offer in
Jul 09). This is mainly because the combined effective offer price for Puncak’s 100% stake in PNSB and 70%
stake in Syabas is worth only RM1.2bn, having adjusted for net debt (see Table 3), which is lower than our
DCF-derived NPV for Puncak of RM1.5bn (before attributing a 30% discount to reflect Puncak’s regulatory
risk).

Table 3: Effective Offer Price for Puncak

PNSB Syabas Total
(RM’000) (RM’000) (RM’000)
SPLASH’s offer 1,936.0 4,143.0 6,079.0
Adjustment for:
Estimated net debt (as at 31 Dec 09)* (2,332.8) (1,845.8) (4,178.6)
(396.8) 2,297.2 1,900.4
30% minority interest at Syabas - (689.2) (689.2)
Effective offer price to Puncak (396.8) 1,608.0 1,211.2
*Assuming 50% of Puncak’s cash balance goes to Syabas
Source: RHBRI

♦ 37% water tariff hike unlikely to come forth. The latest development aside, We continue to believe that the
scheduled 37% water tariff hike is unlikely to happen anytime soon, as such unpopulist move is out of the
Government’s agenda under the current political situation. A case in point is the Government’s move to reject a
10% toll rate hike earlier this year.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 2 of 3
available for download from www.rhbinvest.com
 25 March 2010

RISKS

♦ Risks. The risks for Puncak include: (1) Compensation arising from the delayed 37% scheduled tariff hike is
paid; (2) The 37% scheduled tariff hike is granted; (3) Lower-than-expected variable costs, in particular,
chemical costs; and (4) Water sector restructuring completes earlier than expected.

VALUATIONS & RECOMMENDATIONS

♦ Investment case. We reiterate our cautious view on the water sub-sector as we believe that the water sector
consolidation in Selangor is unlikely to materialise in the near term.

♦ Indicative fair value for Puncak downgraded further. We believe share price of Puncak will continue to
underperform the market, as the water sector restructuring will remain a long-drawn affair. We are lowering our
indicative fair value for Puncak by 13.6% from RM2.95 to RM2.55, at 30% discount to its revised DCF-derived
NPV of RM3.65 (based on higher WACC of 11.5% vis-à-vis 10.9% previously to reflect its higher beta).
Downgrade from Market Perform to Underperform following the downgrade in our indicative fair value.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein
in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated
persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
+
RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for
the actions of third parties in this respect.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 3 of 3
available for download from www.rhbinvest.com