Awaiting catalysts

Ranhill’s 2Q23 result was below our expectation (but in line with consensus), with lower Environmental earnings being partly offset by higher Services contribution. We believe the water tariff hike thesis has largely played out for now. Maintain HOLD with a lower MYR0.60 (-8%) SOP- based TP. We prefer Mega First (MFCB MK, BUY, CP: MYR3.42, TP: MYR4.30) in the utilities space.

Results below our expectation

Ranhill’s 2Q23 net profit of MYR12m (+72% YoY, +8% QoQ) brings 1H23 net profit to MYR23m (+61% YoY), 41%/48% of our/consensus full-year forecasts respectively. Pre-tax profit was in line, with the miss to our net profit forecast coming from higher-than-expected minority interest (lower earnings from 80%-owned RSAJ being offset by higher earnings from 51%- owned Ranhill Worley). No dividend was declared in the quarter, consistent with past practice.

Sequentially stronger

In 2Q23, the Environment segment saw sequentially higher PAT on higher revenue (management noted higher commercial revenue). Cost (excluding D&A) however remained generally elevated. The Energy segment posted sequentially lower PAT from an elevated 1Q23 base due to lower RP2 contribution. The Services segment again saw sequentially higher PAT on the back of higher project billings at Ranhill Worley.

Lowering forecasts

We lower our FY23/24/25 net profit forecasts by 14%/2%/8% respectively to reflect latest run rates. Our TP (derived from a sum-of-parts with RSAJ, RP1 and RP2 valued on DCF) is lowered to MYR0.60 (from MYR0.65). Our HOLD rating is maintained. In our view, further share price upside is contingent upon 1) more rigorous regulatory reforms for the water industry and 2) crystallization and completion of new projects. We have yet to include Ranhill’s new power projects in our forecasts.

Source: Maybank Research - 16 Aug 2023