The mandate to KDEB means that most concessionaire owners in these areas will have to sell their assets, said the research house.

The Edge weekly reported that KDEB had been given the mandate and was also awarded the contract to build the Langat 2 water scheme and the operation and maintenance contract for the project.

"While this mega consolidation will ultimately be beneficial to KDEB, our point of interest is Puncak Niaga and how its shareholders should react to this news. We opine that it is actually not all that bad of a situation."

"While pricing will be the key, the company does own extremely valuable assets and will certainly have a big say in extracting full value for it," said ECM Research.

The research house said Puncak Niaga's 40% market share of water treatment capacity, along with the 70% stake in the water distribution arm had been valued at varying prices by analysts, ranging from RM5.40 per share to RM6.90 per share.

"Be that as it may, current share prices still undervalue the assets," it said.

It said the major question now was whether the purchase consideration would be satisfied by cash or by the issuance of shares in a special purpose vehicle (SPV) that will be incorporated to lead the consolidation, or a combination of both.

"Should it be outright cash payment, shareholders could possibly look forward to another windfall capital repayment in the near term. Nevertheless, holding shares in the SPV may not be a bad option either as it will exposure to all the water assets in the region," it said.

ECM Research said for the period between January and October last year, the combined pre tax earnings of Konsortium ABASS and SPLASH totalled RM100 million (extrapolated from the results announced from its parent companies).

"While this new development changes the balance of play and ultimately the ownership structure in the water sector in the Klang Valley, Puncak Niaga continues to offer value propositions currently given its entrenched position in the water supply chain."

"Cash payment or new shareholding, current share price undervalues its assets. We maintain our buy call on the stock (at RM4.84) and reiterate our immediate target price of RM5.40. While no pricing has been mentioned as yet, shareholders should stick in the for the ride," it said.

Puncak Niaga fell six sen to close at RM4.78 yesterday with 130,700 shares done.