INVESTMENT HIGHLIGHTS

• 1Q19 earnings in-line with expectations

• 7%yoy earnings growth driven by water division

• Key catalysts: water tariff hike, sewerage integration, LSS3 bidding & Kedah CCGT power export to Thailand
   
• Re-affirm BUY at unchanged TP of RM1.35

1Q19 in-line with expectation. Ranhill reported core net profit of RM24m for its 1Q19 (reported net profit: RM21m). The core earnings were in-line, but at the higher end of our estimate accounting for 29.8% of our FY19F of RM80m. Group core net profit increased 7%yoy on the back of a 12% improvement in revenue; the latter was driven by both the environment and power divisions. No dividends were declared for 1Q19. FY18 final dividend of 1sen/share, approved at the recent AGM is payable on 14th May 2019.

Normalised for exceptional items. Our core earnings calculation normalises for: (1) A RM3.5m impairment for Ranhill’s part payment for shares in SM Hydro Energy – previously supposed to undertake a Sandakan CCGT power plant project which has now been cancelled. A total of RM7m which was involved in the deal has now been fully impaired. (2) Unrealised forex gain of RM1m.

Power division. Revenue was up 12.3%yoy but pretax earnings contracted 26%. The former was driven by higher diesel consumption, but fuel payment is a cost pass-through with no actual impact on earnings. Additionally, RP2 was impacted by higher cost due to a scheduled hot gas path inspection maintenance work in the quarter.

Environment division. The environment division (comprising Ranhill’s water business) registered a 12.5%yoy revenue growth while pretax earnings grew 6.5%yoy. This was driven mainly by a natural increase in water consumption (2%-4.5% annual growth in past 5 years) on top of lower unwinding of interest as SAJ enters into the 2nd year of its 3-year operating period.

Tariff hike in the offing? The Minister of Water, Land and Natural Resources, Dr Xavier has been lobbying for a water tariff hike. SAJ is also understood to have submitted a proposal to raise tariffs involving 2nd and 3rd band usage (currently at RM2/m3 & RM3/m3 for domestic consumers) while the 1st band (comprising the first 80m3 of usage) is unlikely to have been proposed an increase. PAAB (Pengurusan Aset Air Sdn Bhd) had late last year approved a RM3.4b capex for Ranhill to reduce Johor NRW (non-revenue water) to 5% by 2025 from the current 24%.

Recommendation. We leave our projections unchanged at this juncture. Re-affirm BUY on Ranhill at unchanged TP of RM1.35. Key catalysts: (1) Scheduled rate hike for Johor water (2) Johor watersewerage integration (3) RM500m NRW-reduction contract wins (4) Progress in 1150MW Kedah CCGT power export to Thailand (5) Successful bid for Large Scale Solar (LSS) 3

Source: MIDF Research - 3 May 2019