What a way to kickstart 2024. PBA Holdings Bhd jumped as much as 29.5% to a record high of RM1.89 on Jan 2, 2024 after the Penang govt entered into a water deal with Perak. The counter close at RM1.81, paring its gains after profit taking activities.

It is simply an outstanding performance by the Penang water player, which has been trading sideways at around 80 sen for most of 2023. It suddenly shot to life in November to rise to RM1.12 on Nov 8. In the past year alone, the counter gained some 138%.

PBA Holdings Bhd’s subsidiary Perbadanan Bekalan Air Pulau Pinang (PBAPP) is the licensed operator for water supply in Penang.

Penang Chief Minister Chow Kon Yeow announced that the state will be signing either a memorandum of understanding or an agreement on financing with Perak on the Sungai Perak water scheme in 2024. Perak will be supplying Penang with treated water, with Penang requesting for 700 million litres of water per day.

The scheme is part of the Penang Water Contingency Plan 2030, where PBAPP will be spending RM1.18 billion over the next few years to increase the state's water supply to 602 million litres per day. The state had also applied to the National Water Services Commission (SPAN) to increase water tariffs for domestic customers, citing the need to reduce subsidies and ensure sustainability.

PBA saw a 18.4% y-o-y fall in net profit to RM36.8 million for 3QFY2023 despite posting a 26% y-o-y increase to RM114.3 million as it benefitted from the higher water tariffs for non-domestic and special categories that took effect from Jan 1, 2023.

The company said the decline in net profit was mainly due to higher operating expenses and finance costs. It appears that investors are getting excited over PBA’s future earnings as it is in a monopolistic business. If the Penang state allows PBA to raise its domestic water tariff, which is the lowest in Malaysia, this will potentially boost its bottomline by RM100 million or EPS by 30 sen.

This means PBA could see its net profit increase to RM200 million, derived from non-domestic water tariff and the savings on domestic subsidy. Should this happen, the company will be able to commit RM1.18 billion on capex until 2030.

The capex investment is crucial as it can increase 30% the supply of treated water, reduce non-revenue water via pipe replacement, which in turn translates to higher profits.

In addition, PBA stands to benefit from the potential diversification to floated solar farm where it will not only save energy cost, it could also export to TNB grid any excess solar energy.

But on the flipside, there may be some hesitancy by the Penang government, which holds a 69% in PBA, to raise water tariff as it doesn’t want to burden Penangnites and the businesses there. Judging from the share price movements, investors may want to jump in as a water tariff hike seems inevitable and this should be an immediate boost to PBA’s top-and-bottom line.

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Here are some of the setup in Hourly Chart:

1. Price trading far from 20MA
2. High volume downbar at the top. Expect deeper pullback

Looks out for strength signal near 20MA in hourly chart