Commendable progress in regulatory reforms

The synchronised implementation of the domestic tariff hike represents further progress in the regulatory reform journey for the water industry. For Ranhill however, the tariff hike has been more than priced-in in our view given the significant share price appreciation in recent months. Maintain SELL with an unchanged MYR0.70 SOP-based TP.

Domestic tariff hike and electricity surcharges

The regulator SPAN has announced that water tariffs for the domestic segment in Peninsular Malaysia and Labuan will be raised by an average of MYR0.22/m3 from 1 Feb 2024. This would result in monthly bill increases of MYR1.60 - MYR8.00 for households consuming 20m3/month. The hike includes an electricity surcharge of MYR0.02-0.10/m3 (varies by state, reviewed annually to cover the ICPT component of operators’ electricity costs) which will be imposed on all users (including the non-domestic segment).

Incremental revenue, higher costs to follow

Tariff details for individual states have not yet been disclosed at the time of writing. Assuming a MYR0.22/m3 increase in RSAJ’s domestic tariff, we estimate an incremental revenue of c.MYR95m annually. Separately, a hypothetical MYR0.05/m3 electricity surcharge could generate an additional c.MYR10m from the non-domestic segment annually. We note that tariff hikes are typically accompanied by higher costs and lease payments to PAAB.

Rich valuations

A synchronized 3-year tariff cycle with an electricity pass-through represents significant regulatory progress for the industry. Our net profit forecasts and MYR0.70 TP (derived from a sum-of-parts with RSAJ and the power plants valued on DCF) are unchanged pending official announcement of the tariff details. Ranhill’s current valuations are rich, and we believe the possibility of a general offer in the near term is low.

Source: Maybank Research - 18 Jan 2024