FINANCIAL OVERVIEW OF RANHILL

Continuing from my previous blog about the overall business operation of Ranhill Utilities Berhad (“Ranhill” or “the Group”) (Who’s Ranhill? They do water treatment or powerplant? - Who’s Ranhill? They do water treatment or powerplant? | I3investor) and also diversification into engineering sector (Ranhill is underrated - Ranhill is underrated | I3investor) through the acquisition of two companies. Feel free to click the link and check out my previous blog posts.

Let’s dive deeper to see their overall financial performance which I promised to write.

Ranhill has announced its Q2FY2021 result on 30^th August, let’s take a look at the latest financial performance…

• Comparing the revenue of 2QFY21 vs 2QFY20, Ranhill’s top line is remained resilient. As per Ranhill’s commentary on revenue, the slight decline in revenue was mainly due to lower revenue in Energy sector attributed by lower tariff in Ranhill Powertron Sdn Bhd (RPI) post loan completion.
• Similarly, the profitability of Ranhill declined (2Q21 vs 2Q20) largely due to lower revenue from the Energy sector as mentioned above.

• On the other hand, by comparing its current quarter versus the preceding quarter, an improvement has been seen. The profit attributable to ordinary equity holder of the parent for the current quarter has increased by 24.0% mainly contributed by higher profit from Ranhill Water Services.

POTENTIAL EARNINGS CATALYST GOING FORWARD

ENVIRONMENT SECTOR

Water Tariff

In my personal opinion, majority of the revenue is derived from the environment sector mainly water supply services, water tariff revision is necessary to sustain Ranhill’s ability to upgrade and maintain water assets.

• As mentioned in the annual report, the Malaysian government has approved an upwards revision of water tariffs, and further to that, the National Water Services Commission (SPAN) has conducted online public consultations on Johor state to obtain feedback from water users on the proposed tariff adjustment in June 2021. Let’s see if the water tariff adjustment will be announced soon…
• With the upward water tariff adjustments, it benefits Ranhill in numerous aspects as following: -
  • Increased revenues
  • Ability to undertake much-needed CAPEX works that improve NRW and overall reliability of water supply
  • Strengthens the water system and infrastructure
  • Enhanced water conservation awareness program
  • Reduction in water consumption per capita per day

Renewal Of License for Operating Period 5 (“OP5”)

As a sole water distributor in Johor, Ranhill is required to apply and comply with the conditions of a service license to be granted by the Ministry of Energy, Green Technology and Water.

• Ranhill was being renewed by SPAN the fifth time covering 1^st Jan 2021 to 31^st December 2023
• This signifies that Ranhill has good management of water resources in Johor and the ability to meet operating standards as set out by the water industry regulator, SPAN
• Further to that, I guess Ranhill might be able to continuously renew their service licences with SPAN backed by their proven track records.

Expanding Geographical Presence to Indonesia?

• Ranhill has previously attempted to expand its regional footprint into Indonesia and going forward will continue to target industrial parks in these countries given Indonesia is another prospective market, offering significant potential.
• Notably, Ranhill had last year formed a consortium with several strategic partners to bid for the development of a source-to-tap project for 5 regions in Indonesia namely DKI Jakarta, Bekasi City, Bekasi Regency, Karawang Regency and Bogor Regency involving a potential gross capacity of ~860mld
• They have submitted the feasibility studies to the regulatory authority (Kementerian Pekerjaan Umum dan Perumahan Rakyat) and waiting for the outcome and approval before a bidding process is launched.
• I believed this project could be a meaningful boost to the group, potentially expanding its existing source-to-tap water capacity (which is currently run by SAJ for the state of Johor) by an estimated 42%, if successful.

ENERGY SECTOR

PPA Extension for Ranhill Powertron I

• Ranhill Powertron I (Teluk Salut Power Plant) has PPA until 2029, where Ranhill seeks to further extend its concession term by an additional 10 years as the new steam turbine could last for another decade.
• The latest update from the quarterly announcement for 2QFY2021, Ranhill stated that they have commenced negotiation with the government for the PPA extension
• I believed the chances of them being extended are quite high given the competitive tariff will provide them a good chance in renegotiating an extended tenure going forward.

Opportunities in Sabah and Indonesia

• In Sabah, the expected completion of Sabah East-West Transmission line in 2023 provides an opportunity for Ranhill’s RPI and RPII to despatch up to 400MW of additional electricity from Sabah’s West Coast to the East Coast.
• Whereas, in Indonesia, it has projected its energy demand will grow by 5% in 2050 where approximately 552.5GW of installed capacity is required by 2050, with 260GW and 141GW to be generated from RE sources and gas power plants respectively.

Bidding for LSS5

• Ranhill has won bidding for 50MW from LSS4, I guess they will be leveraging on the winning track record and continue to participate in the upcoming LSS5 bidding exercises in 2021

GENERAL

Secondary Listing in Singapore

• Ranhill is exploring the possibility of a secondary listing on the Main Board of the Singapore Stock Exchange by way of an introduction to broaden its investor base.

My 2-cents view – will the dividend yield return to the previous high?

While the recent performance of Ranhill might not be outstanding, I do like the company due to their earning stability and visibility from the Environment sector and Energy sector. These two sectors of Ranhill, I believe, could do well when the economies are recovering from the pandemic. As mentioned in my previous blog post, the contribution of the new engineering sector should provide a healthy boost to the earnings of Ranhill. Hence, I estimate the revenue and profitability will be better than last year… let’s see the next financial result.

Another thing that I think it’s worth mention here is the dividend yield for the past three years (FY2018-FY2020) stood at 6.5%*, 5.7%*, and 3.2%* respectively. In my opinion, the dividend yield is relatively high and favourable reward for the shareholder. Despite the lower dividend yield in FY2020 due to challenging business environment, I do foresee the upcoming dividend yield may return to the previous high if any of the above-mentioned earnings catalysts materialise. I will keep track of the progress of respective development, and if things go smoothly, I would say Ranhill may surprise the market on the upside. Let’s stay tune and hope we could hear some good news from the management…

Note*: Dividend yields are based on financial year end closing price of FY2018-FY2020 (RM0.9231, RM1.0489, RM0.8762 respectively)