Initiate with BUY and MYR0.60 TP

We initiate coverage of Ranhill with a BUY rating and MYR0.60 TP (based on a sum-of-parts [SOP]). We view risk-reward as being favourable with RSAJ’s long overdue water tariff hike a step closer to fruition following recent Cabinet approval, but not yet priced-in. A potential reversion to cash dividend (c.5% yield) could further enhance the stock’s appeal.

A water tariff hike is closer

RSAJ, being the exclusive water source-to-tap operator in the state of Johor, is the main earnings contributor to Ranhill. The lack of a tariff hike in recent operating periods has resulted in significant earnings pressure at RSAJ and thus the group. The Federal Government had, in June 2022, approved an average MYR0.25/m3 tariff hike for non-domestic users effective 1 Aug 2022. We assume an average hike of MYR0.15/m3 (+4.6%) for Johor non-domestic users from Jan 2023, culminating in a 2.5% increase in overall tariff. Along with volume recovery, we forecast a more than doubling of FY23 net profit.

Pursuing new projects

Ranhill has historically been active with pursuing new opportunities, with a notable recent success being the 50MW LSS4 solar plant (under construction, not yet included in our SOP). Ranhill is pursuing a water source-to-tap project in 3 areas of Jawa, Indonesia. It has submitted a tender for the development of a new 100MW gas-fired plant in Sabah (targeted 2025 commissioning). Talks are also underway with the EC for a 75MW solar farm in Kluang, Johor to partially power RSAJ’s operations.

A return to cash dividend?

Ranhill gravitated towards stock dividends in FY20 and FY21. We believe stock dividends are generally less appealing to investors, and expect Ranhill to revert back to cash dividends going forward. We assume a 2sen annual DPS beginning FY22 (implying c.5% yield), with potential upside risk from FY23 post RSAJ’s tariff hike.

Source: Maybank Research - 17 Aug 2022