INVESTMENT HIGHLIGHTS

• Tariff hike proposal being reviewed by SPAN

• Water-sewerage joint-billing targeted by month-end

• RM500m national NRW reduction program kickstarted in Kedah; Ranhill is one of few key beneficiaries

• Re-affirm BUY at unchanged TP of RM1.15, 7% yields attractive

Ranhill SAJ visit. We recently took a trip to Johor to visit Ranhill Holdings’ (Ranhill) 80%-owned Ranhill SAJ (SAJ). SAJ is Ranhill’s key earnings generator accounting for 77% of PAT. Besides SAJ’s management, Ranhill Water Services (RWS), a 100%-owned unit of Ranhill specialising in NRW (non-revenue water) management and solutions, also hosted the visit. We outline some the key takeaways from the visit in this report.

Tariff hike proposals. SAJ’s 4th Operating Period financial forecasts and tariff hike proposals have been submitted to SPAN for review, before going to the Minister/Cabinet for approval. Key justifications are: (1) RM500m/annum spent on capex – partly for NRW management with a target of 20% in FY22 from 24.7% in FY17, infra expansion to meet organic 3%/annum water demand, and (2) Inflation impact on opex. Since migration to a licensing regime, SAJ had been granted two tariff hikes (the last one in 2015).

Joint-billing targeted to kick start soon. Ranhill is targeting jointbilling of water and sewerage to kick start by end of this month. Negotiations have been held with the State Government and water regulators – positive sentiment so far and estimates incremental RM1m/annum revenue. If joint-billing is successfully executed, operational integration is expected within 12 months. A switch to volumetric tariff could bring in incremental RM300m-RM400m revenue and boost earnings by 30%-40%.

Key beneficiary of NRW program. As part of the national NRW reduction program in 6 states (in critical condition), some RM500m NRW reduction grant will be disbursed in the next 12 months. Kedah was the 1st state to tender out contracts in recent weeks. Ranhill stands a solid chance of securing these contracts (both direct and indirectly) given limited local expertise; Ranhill is one of only 2 key NRW players in Malaysia.

Deeply undervalued. At just 8.7x FY19F PE, Ranhill is deeply undervalued. At current market cap, implied valuation for its water business is a mere 7.7x, well below Penang-based peer, PBA Holdings’ 10x PE and the broader utilities sector’s average PE of 11x. Balance sheet has been successfully de-geared since its 2016 IPO, while attractive dividend yields cushions downside. Key catalysts: (1) Schedule rate hike for Johor water, (2) TGE progress into production well drilling, and (3) Johor water-sewerage integration

Source: MIDF Research - 15 Oct 2018