Review

• Ranhill Utilities Berhad’s (RANHILL) 9MFY23 core profit of RM29.9mn (+36.1% YoY) came in below expectations, accounting for 65% of our and 64% of consensus full-year forecasts. The missed earnings were mainly attributed to higher-than-expected maintenance costs for Ranhill SAJ and Ranhill Sabah Energy II (RSEII) power plants.

• YoY: 3QFY23 revenue surged 40.4% YoY, underpinned by higher water revenue for Ranhill SAJ in Johor from non-domestic water tariff hike, higher contribution from the Engineering Services segment arising from chargeable hours of newly secured projects and higher energy payment for Ranhill Sabah Energy I (RSEI) power plant. Despite significant revenue growth, 3QFY23 net profit grew by only 9.7% YoY, dragged by higher maintenance non-revenue water (NRW) costs and higher chemical costs from higher production volume for Ranhill SAJ and higher maintenance costs in relation to a major inspection at RSEII.

• YTD: 9MFY23 revenue advanced 34.0% YoY on the back non-domestic water tariff hike in Johor, higher chargeable hours of Engineering Services projects and higher energy payment for RSEI. Note that the capacity factor for RSEI is c.79% in 9MFY23, much improved from 72.9% in FY22. Consequently, net profit soared 40.9% YoY.

• QoQ: 3QFY23 revenue increased 2.6% QoQ due to higher revenue recognition from the Engineering Services segment and higher energy payment for RSEI. Nonetheless, net profit dropped 15.2% QoQ, driven by higher maintenance costs in RSEII, higher maintenance NRW costs, and higher chemical costs for Ranhill SAJ in Johor.

Impact

• We increased the cost assumptions for Ranhill SAJ and RSEII in FY23, hence trimming our FY23 earnings forecasts by 6.8% while maintaining our FY24 and FY25 forecasts unchanged.

Outlook

• Environment Segment: According to Minister Nik Nazmi, Minister of Natural Resources, Environment, and Climate Change, there is a unanimous consensus among all state governments on raising water tariffs, as some have yet to see an increase in the past 40 years. The domestic water tariff will likely be hiked soon, which would lift the bottom line of RANHILL, the sole sourceto-tap water supplier in Johor. Regarding the Djuanda Source-to-Tap project in Indonesia, the RANHILL-led consortium is currently waiting for the acceptance of the feasibility studies and the call for tender exercise. Recall that RANHILL has recently inked a memorandum of understanding (MOU) with China Energy International Group Co Ltd (CEIG) to pursue the project jointly. RANHILL is expected to reduce the stake in the consortium to c.50% (from 75% during feasibility studies) due to the high capital commitment expected (c.USD900mn or c.RM4.3bn). The group is the frontrunner in winning the tender in Indonesia, considering it has the right to first refusal.

• Energy Segment: The Sabah East-West Transmission line is expected to be completed in 2023, enabling up to 400MW of additional electricity to be despatched from Sabah’s West Coast (where both RANHILL’s 190MW power plants are situated) to the East Coast. Meanwhile, the group’s large-scale solar project in Bidor, Perak, has achieved 98.9% of project implementation progress as of 31 October 2023, on target to achieve the scheduled commercial operation date of 31 December 2023.

• Engineering Services Segment: As oil and gas companies face intense and increasing demand to decarbonise their operations, RANHILL’s subsidiary Ranhill Worley is the frontrunner in securing more engineering design contracts for carbon capture and storage projects.

• Overall, we are sanguine on the outlook of RANHILL due to i) the potential increase in domestic water tariff, ii) the expansion into Indonesia via the Djuanda Source-to-Tap project, iii) the large-scale solar project, which will be commercially operational by the end of this year; and iv) a new 100MW combined cycle gas turbine power plant in Kimanis, Sabah expected to be commercially operational by 1 March 2026.

Valuation

• Considering the better prospect of the group from a potential domestic water tariff hike and its expansion plans on multiple fronts, we take this opportunity to lower the discount rate for Ranhill SAJ and trim its holding company discount, hence arriving at a higher target price of RM0.96/share (previously RM0.70/share) based on sum-of-parts (SOP) valuation. Due to lower upside potential following the recent surge in share price, we downgrade RANHILL to Hold.

Source: TA Research - 15 Nov 2023