The followings are key takeaways from RANHILL’s virtual analyst briefing:

i) Lower electricity cost for Ranhill SAJ in 2HFY23;

ii) Negotiating to revise the target for NRW matching grant;

iii) Decision on ‘Initiator Status’ for Djuanda project by Dec 2023;

iv) RANHILL to resubmit its CGPP application.

We raise our FY23-FY25 earnings forecasts by 6%-10%. Maintain Buy with a higher target price of RM0.70/share (previously RM0.67/share) based on sum-of-parts (SOP) valuation.

Lower electricity cost for Ranhill SAJ in 2HFY23

Despite receiving tariff arrears of RM9mn from October 2022 to December 2022 in 2QFY23, Ranhill SAJ was impacted by the extra RM9.3mn incentive cost passthrough (ICPT) charges, which effectively offset the additional tariff arrears collected. Nonetheless, for 1 July to 31 December 2023 period, all water and sewerage operators (including Ranhill SAJ) will be charged ICPT surcharge of 3.7sen/kWh instead of 20.0sen/kWh surcharge in 1HFY23, leading to improved profitability for the group.

Negotiating to Revise the Target for Matching Grant

Under the National Non-revenue Water (NRW) Reduction programme, state water operator that manages to achieve the NRW target will be eligible for matching grant for part of the cost incurred (50% or 75% depending on target achieved) in undertaking related works. The incentive grant amounts to total of RM1.4bn and is specifically for water operators with NRW<40%. RANHILL is currently negotiating with the Suruhanjaya Perkhidmatan Air Negara (SPAN) to revise the target to a more achievable level of around 25.0% as around two third of the grants under the programme (2021-2025) has yet to be claimed. The minimum target to be eligible for incentive grant in 2023 is 21.7% while the lowest NRW achieved by any water operator in 2022 is 26.3% by both Johor and Penang. If negotiation succeeds, the matching grant is expected to be distributed by 2024.

Decision on Djuanda project ‘Initiator Status’ by Dec 2023

According to management, the RANHILL-led consortium has submitted the feasibility studies to the Indonesia’s Ministry of Public Works and Public Housing (PUPR) and is currently waiting for the acceptance of the studies and the award of “Initiator Status” to the consortium. PUPR will then call for a tender exercise. Due to the high capital commitment expected for the project (c.USD900mn), RANHILL plans to reduce the stake in the consortium to c.50% (from 75% during feasibility studies) if the group proceeds with the project. The project will involve minimal collection risk as RANHILL will be collecting the bills directly from the local authority PUPR. Additionally, based on the memorandum of understanding signed earlier, the tariff will be increased every 3 years.

To resubmit CGPP Application

RANHILL has submitted applications for two 30MW quotas under the Corporate Green Power Programme (CGPP) but the applications were not approved due to issues with documentations. The group intends to resubmit its application as soon as possible. Note that the offtakers for the CGPP submitted by the group are Ranhill SAJ and Indah Water.

Impact

We raise our FY23-FY25 earnings forecasts by 6%-10% to reflect the lower electricity cost for Ranhill SAJ.

Valuation

Maintain Buy with a higher target price of RM0.70/share (previously RM0.67/share) based on sum-of-parts (SOP) valuation.

Source: TA Research - 22 Aug 2023