INVESTMENT HIGHLIGHTS

• 2Q19 earnings in-line with estimates

• 14%yoy earnings growth driven by water division

• Johor NRW contract to kick in from 3Q19

• Re-affirm BUY at unchanged TP of RM1.45

2Q19 earnings in-line. Ranhill registered core net profit of RM20m for its 2Q19, bringing 1H19 core earnings to RM44m (after normalising for RM4m net exceptionals recognised in 1H19 – See Exhibit 2) accounting for 52% of our FY19F. No dividends were declared for the quarter. Overall, earnings were up 23%yoy in 2Q19 driven by growth in the water division. On sequential basis, earnings contracted 15%qoq as 1Q19 reflected a one-off contribution from handover of the Forest City STP (sewerage treatment plant) project.

Environment division. 2Q19 earnings for the water division were up 38%yoy driven by higher water consumption at 80%-owned SAJ, on top of lower unwinding of interest as SAJ is now in the 2nd year of its 3-year operating period. Growth would have been stronger had it not been for the deferment of a federal NRW tender and deferred STP projects at Forest City (on top of the one already completed), previously in the pipeline.

Power Division. The improvement at SAJ was slightly offset by a decline (-7%yoy) in power division earnings. RP2 is facing low load factor given overcapacity in West Sabah which is impacting earnings negatively. RP1 however, is utilised as baseload capacity and is not really impacted by the situation. The construction of a stronger grid connecting West to East Sabah (currently ongoing and expected to complete by 2021) is expected to double the grid’s capacity and increase dispatch from West Sabah IPPs - this bodes well for RP2’s load improvement in the mid-term.

NRW projects in the pipeline. There was a federal tender for RM500m worth of NRW (non-revenue water) contracts for 7 critical states (including Perlis, Kelantan, Kedah, Pahang) with high NRW previously, but this had been deferred for the tender to be restructured, we understand. A new tender is expected to be out in 3Q19 and Ranhill is looking to participate. Nevertheless, from 3Q19 onwards, the recently won RM151.5m NRW contract for Johor (running from 1st July 2019 till 30th June 2021) is expected to kick in.

DRP plans. Though already approved, Ranhill has yet to implement the dividend reinvestment plan (DRP). We understand it would be looking to initiate the DRP once capex requirement increases driven by current expansion initiatives (e.g. Kedah CCGT, water operation expansion). For the meantime, management is looking to sustain the current cash dividends.

Recommendation. Re-affirm BUY on Ranhill at unchanged TP of RM1.45. Key catalysts: (1) Progress in 1150MW Kedah CCGT power export to Thailand (2) Scheduled rate hike for Johor water (3) Johor water-sewerage integration (4) RM500m NRW-reduction contract wins (5) Successful bid for Large Scale Solar (LSS) 3.

Source: MIDF Research - 15 Aug 2019