Taking a stance on tariff hike

Ranhill’s 2Q22 results are in line with our expectation, with no material segmental surprises. For now, the investment thesis continues to revolve around the timing and quantum of a water tariff hike (which the Cabinet has approved but the State has not implemented). Maintain BUY with an unchanged MYR0.60 SOP-based TP. A potential reversion to cash dividend (c.5% yield) could further enhance the stock’s appeal.

Results within our expectation

Ranhill’s 2Q22 net profit of MYR7m (-23% YoY, -5% QoQ) brings 1H22 net profit to MYR14m (-12% YoY), 50%/35% of our/consensus full-year forecasts respectively. Note that a water tariff hike could have been reflected in consensus FY22 forecasts. No cash dividend was declared in the quarter, in line with FY21.

No major surprises

All segments posted higher QoQ revenue in 2Q22. Environment revenue was up 1% QoQ, in line with trend post economic reopening. The Energy segment enjoyed increased energy payments for diesel substitution at RP1 and RP2 (due to gas curtailment). Management also flagged higher maintenance cost at the power plants during the quarter. Services saw higher revenue recognition from wastewater treatment projects. Separately, there was no notable development in the status of potential new projects.

Maintaining forecasts

Our earnings forecasts and MYR0.60 TP (derived from a sum-of-parts with RSAJ, RP1 and RP2 valued on DCF) are unchanged. There has not been any tariff-related news in the past month. Our base case remains a MYR0.15/m3 hike (+4.6%) in average non-domestic water tariff from Jan 2023. Every MYR0.05/m3 increase in average non-domestic water tariff would raise annual net profit by c.MYR6m.

Source: Maybank Research - 29 Aug 2022