INVESTMENT HIGHLIGHTS

• 9M18 revenue and EBIT spot-on but net profit fell short given higher unwinding of interest charge

• Core operating earnings improved 10%yoy

• FY18F/19F net profit tweaked to adjust unwinding of interest assumptions, but operating earnings intact

• Re-affirm BUY at unchanged TP of RM1.30

Operational earnings in-line, reported earnings fall short. Ranhill’s 9M18 Revenue/EBITDA/EBIT of RM402m/RM87m/RM74m were spot-on accounting for 75%/75%/75% of our FY18F respectively. However, reported net profit was impacted by an increase in concession unwinding interest charges (non-cash accounting treatment). As a result, 9M18 earnings accounted for 67% of our full year forecast, technically, falling short of expectations. A higher 2sen/share interim dividend was declared.

Non-cash hit. The unwinding of interest charge (the process of reversing the difference between the present value of service concession assets and fully accrued service concession obligations) relates to Ranhill SAJ’s service concession obligation, and tends to be front-loaded and tapers off over the concession period – in this case, Ranhill SAJ’s 3-yearly water operator license (OP4: Operating Period-4) which was renewed effective Jan18. Since the licensing regime is short compared to a typical concession, the impact of unwinding of interest can be quite pronounced.

Core operating earnings expanded. Given the imbalance in recognition of unwinding of interest charges i.e. FY17 reflected the final year of Ranhill’s OP3 hence is the lowest in that licensing cycle whereas FY18F reflects the 1st year of its OP4 hence is significantly higher, reported earnings showed a sharp 35%yoy fall. Revenue and EBITDA actually grew some 5%yoy and 10%yoy reflecting Ranhill’s improved core operating performance driven by lower O&M cost for its power unit and an increase in consumption for SAJ (typically 2%-3% growth/annum).

Net profit tweaked but valuations intact. Our net profit is tweaked lower by 13%/10% over FY18F/19F for adjustments of unwinding of interest assumptions but this does not impact our SOP-based valuation (mainly comprising DCF values of Ranhill’s water and power assets). Our revenue/EBIT forecasts remain unchanged over the period. More importantly, our BUY thesis premised on: (1) A potential rate hike which accounts for the bulk of our FY19F growth, (2) Takeover of Johor sewerage operation which could drive a 30%-40% earnings gap-up (3) Entry into RE via its geothermal development, remains intact.

Reaffirm BUY on Ranhill. Our TP is unchanged at RM1.30/share. Our TP still conservatively excludes potential earnings contribution from: (1) Water-sewerage operation integration (2) The RM500m national NRW program (3) Tawau Geothermal energy project, which could drive our valuations higher to RM1.60/share (blue-sky scenario). Key catalysts: (1) Schedule rate hike for Johor water (2) Johor water-sewerage integration (3) RM500m NRW-reduction contract wins (4) TGE progress into production well drilling.

Source: MIDF Research - 14 Nov 2018