This article first appeared in Corporate, The Edge Malaysia Weekly, on April 25 - May 1, 2016.

PUNCAK Niaga Holdings Bhd may be cash rich following the disposal of its water concession assets last year, but finding a new business to invest in that can generate comparable returns will prove challenging.

So far, the only acquisition the company has proposed is of its sister company, TRIplc Bhd, which is also controlled by Tan Sri Rozali Ismail. Assuming Puncak Niaga pays cash to acquire TRIplc — a company with a market capitalisation of RM97 million — it would barely dent the former’s balance sheet.

TRIplc is in a completely different type of business — property development and facilities management — but it has a similar business model to Puncak Niaga’s former mainstay. Like Puncak Niaga’s water concession before, TRIplc relies heavily on government concessions.

TRIplc’s core revenue generator is a 23-year concession to construct and maintain 

Zone 1, Phase 2, of the UiTM Puncak Alam Campus, which will expire in 2034. Moving forward, a catalyst for TRIplc’s earnings is a RM599 million concession that it secured in February from University Teknologi MARA (UTM) for the construction of a 400-bed teaching hospital, academic facility and accommodation.

As it stands, however, TRIplc’s earnings are a little too small relative to Puncak Niaga’s size. For the 12 months ended Feb 29, 2016, TRIplc posted a net profit of RM8.352 million.

The question minorities will be asking is whether Puncak Niaga will be able to effectively invest the remaining RM1.1 billion of its cash. Perhaps it might be better for Puncak Niaga to return more earnings to shareholders in the form of dividends. Recall that Puncak Niaga has already paid about one-third, or RM534 million, from the RM1.55 billion disposal of its water assets.

After all, Puncak Niaga’s recent venture into non-concession business has only eroded shareholder value. To date, the group’s venture into oil and gas (O&G) that began in 2011 has incurred cumulative losses before tax of RM29.88 million. Recall that Puncak Niaga in June 2011 acquired two O&G companies for RM182.88 million — GOM Resources Sdn Bhd and KGL Ltd.

Arguably, the O&G arm did perform well initially, raking in RM83.4 million in profit before tax in FY2012 ended Dec 31. But those gains were  wiped out by the low oil prices.

The unit’s biggest loss was in FY2015, with a loss before tax of RM126.7 million. In FY2014, the segment posted a profit before tax of RM24.3 million. The main reason for the losses was a sharp decline in revenue for the segment, falling 87% year on year to RM63 million.

With no reprieve in sight for crude oil prices, Puncak Niaga’s O&G arm poses a serious liability to the whole group. Not surprisingly, it has been reported that Puncak Niaga is seeking to exit the business. The price Puncak Niaga will be able to fetch for its O&G units, however, will be much lower than what it initially paid.

The O&G units may have a proven track record with Petroliam Nasional Bhd (Petronas), but contracts have not been forthcoming. The last contract Petronas awarded to Puncak Niaga was back in 2013.

Without water and O&G, Puncak Niaga would have only one operating unit left — construction. The group’s construction arm hasn’t had a stellar year either. In FY2015, the unit lost RM8.35 million before tax. In contrast, the segment generated a profit before tax of RM10.84 million in FY2014.

Against this backdrop, the acquisition of TRIplc may not be the catalyst that Puncak Niaga’s minority shareholders have been hoping for.

Note that Rozali has a 39.67% stake in Puncak Niaga and a 28.38% stake in TRIplc.

Notably, TRIplc’s balance sheet isn’t as healthy as Puncak Niaga’s — with a net debt of RM233.26 million. That works out to a net gearing of 1.5 times. However, the high level of gearing isn’t a big issue for TRIplc because the debts are tied to the reliable concession income.

The company’s RM240 million senior medium term notes (MTN) has an AAA rating from the Malaysian Rating Corp Bhd. This is primarily due to the strong free cash flow generated by the concession of RM54.3 million a year, compared with the highest MTN debt obligation of RM35.6 million. Furthermore, UiTM is bound to pay the concession company the outstanding amount of the loan in the event the concession is terminated due to non-performance.

TRIplc will have plenty of work to do with the new concession agreement it secured in February for the UiTM teaching hospital. TRIplc may also have more concessions to contend for in the future as the constrained federal budget acts as a catalyst for more public-private partnership projects.

In short, TRIplc in itself appears to be a decent asset to acquire, not considering the acquisition price that has not yet been determined. At its closing price of RM1.47 per share last Friday, TRIplc is valued at 11.5 times earnings and 0.63 times net asset value.

Unfortunately, TRIplc simply isn’t big enough. The real issue is whether Puncak Niaga will be able to create additional value going forward, without relying on concession businesses. Otherwise, it might make more sense for Puncak Niaga to return the surplus cash to shareholders in the form of dividends.

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