Warrants Update: RM1 bil war chest lifts Puncak-WB

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AFTER falling 36% over four weeks to as low as RM2.32 on Dec 15, shares of Puncak Niaga Holdings Bhd rebounded 27% the past fortnight to close at RM2.96 last Wednesday — buoyed by the promise of a RM534.3 million special dividend finally happening early this year.

Gains in its company-issued warrant Puncak-WB were even more pronounced at 50% or 63 sen over the same two weeks, to close at RM1.95 last Wednesday. That puts Puncak-WB at a small 0.34% discount to the underlying securities. Puncak-WB has a RM1 strike price, one-to-one conversion ratio and expires on July 20, 2018.

The special dividend of RM1 per share stem from the impending disposal of its Selangor water assets for RM1.56 billion, which will also leave the company with some RM1 billion cash hoard that is expected to be used for acquisitions.

“We believe that following the disposal of Puncak’s water assets, which may conclude by 1Q2015, Puncak will need to utilise its estimated RM1 billion war chest wisely. After the water asset disposal, Puncak’s oil and gas (O&G) business will be the largest revenue contributor, but the industry is facing challenging times due to falling oil prices,” Affin Hwang Capital Research analyst Lim Tee Yang wrote in a Dec 26 note. He has a “buy” and RM3.55 target price on Puncak.

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“We believe M&A (mergers and acquisitions) within the O&G segment remains a possibility but nothing is firm at this juncture,” he added.

At the time of writing, Bloomberg data showed five analysts having “buy” recommendations on Puncak while two had “hold” recommendations. There were no “sell” calls. Target prices ranged from AmResearch’s RM3.40 to CIMB Research’s RM4.28, averaging at RM3.89.

While the sealing of a sale and purchase agreement marked the end of a six-year saga between Puncak, the Selangor government and the federal government, it is not immediately certain how the sharp fall in crude oil prices will change valuations for Puncak, whose core business will be in O&G after the disposal of its water assets.

Using Affin Hwang’s RM3.55 target price, Puncak’s shares have an upside potential of 19.9%.

In theory, Puncak-WB should be worth 30.8% more at RM2.55 if Puncak shares appreciate to RM3.55, assuming zero premium to the underlying securities.

Kenanga Research attributes Puncak’s recent decline to the latter’s removal from the shariah-compliant list. In a note last Monday, the research house reiterated an “overweight” call and RM3.99 target price as Puncak slipped below its disposal price tag of RM2.89 per share. Risks to its recommendation include “further delay in the water restructuring exercise, absence of special dividends and a downward revision in the takeover valuation of the water assets”.

Tan Sri Rozali Ismail had a 40.86% stake in Puncak as at Dec 19.
 

This article first appeared in The Edge Malaysia Weekly, on January 5-11, 2015.