INVESTMENT HIGHLIGHTS

• Wins NRW contract in Johor

• Estimated 10% annual uplift to earnings

• PAAB has approved RM3.4b NRW capex up till 2025 for Johor

• Re-affirm BUY at a higher TP of RM1.45

NRW contract win. Ranhill Water Services Sdn Bhd (wholly owned by Ranhill) has won a RM151.5m 2-year Non-Revenue Water (NRW) reduction contract in the state of Johor. The contract was awarded by Ranhill’s 80%-owned Ranhill SAJ (Johor exclusive water operator) through a competitive tender process. The project is expected to be undertaken immediately, running from 1st July 2019 till 30 June 2021. This is the 5th successive NRW project in Johor that has been secured via RWS through open tender since 2011. From 2005 to 2019, RWS has successfully reduced Johor NRW from >37% to 22.9%. The contract will be based on specific KPIs and addresses holistic NRW reduction and management covering:

1. Establishment of new District Meter Areas (“DMA”) and reestablishment of existing DMAs;

2. DMA meters monitoring, maintenance and verification;

3. Upgrading and maintenance of the AquaSMART system, NRW manager and NRW stock inventory system;

4. Hydraulic modelling and commercial loss management;

5. Third party and leak repair works;

6. Pipe connection and ancillary works;

7. Reservoir monitoring;

8. Trunk mains survey and monitoring;

9. Pressure management;

10. Installation of meters, PRVs and valves; and

11. Other related NRW reduction and management works related to physical and commercial losses components.

Capex to be funded by PAAB. Capex for the NRW project will be funded by PAAB (Pengurusan Aset Air Bhd) as part of its capex for Johor and will be repaid by Ranhill SAJ over a 45-year lease rental (as part of the usual bill collection from consumers). We estimate the latest NRW contract will enhance Ranhill’s revenue by 4% (RM75m) on annual basis and earnings by 10% (RM9m), at an estimated 12% PAT margin. PAAB had late last year approved a total of RM3.4b capex for Ranhill to reduce Johor NRW to 5% by 2025 from current levels – we would not rule out further contract wins beyond the current 2-year period.

Forecasts revised up. Taking into account timing of the NRW project which commences in the middle of the year, we raise our FY19F earnings by 6% and FY20F by 10%.

Recommendation. Re-affirm BUY on Ranhill at a higher TP of RM1.45 (from RM1.35 previously) after factoring in the NRW contract win. 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 - 2 Jul 2019