KEY INVESTMENT HIGHLIGHTS

• Weak 2Q20 impacted by the MCO, results below expectation

• Environment division impacted mainly by lower developer contribution and lower EPC contracts, minor impact on water consumption

• FY20F/21F earnings conservatively revised down 34%/8%

• BUY maintained at lower SOP-derived TP of RM1.25, 4.2% dividend yield attractive in current low bond yield environment

Weak 2Q20. Ranhill reported a net profit of RM13m for its 2Q20. This brought 1H20 earnings to RM31m, which was weaker than expected accounting for 33% of our FY20F. Its 2Q20 group earnings fell 35%yoy to RM13m given impact of the MCO running through mid-March till early-May.

Lower water consumption and discounts. Environment division revenue fell 10%yoy to RM303m while PAT declined 22% to RM37m in 2Q20. The drag came from: (1) Lower water consumption - we understand that SAJ’s volumes contracted by ~75mld, or ~4% of daily consumption during the MCO (2) Significantly lower developer contribution (3) Discounts given to B40 group water bills (limited for month of March) of RM2.6m (4) Covid-19 monetary contribution (~RM2m recognized in 1H20 out of total RM3m-RM4m) (5) Lower EPC contracts.

Developer contribution pushed out. The 4% impact on water consumption is pretty much negligible if annualized, as key nondomestic customers were still operational during the lockdowns. The key drag in 2Q20 (and likely throughout FY20F) is the significantly lower developer contribution given delays in property project progress (in turn, delaying in handover of the property developments’ water assets to SAJ). Developer contribution typically contributes RM20m-RM25m annually to SAJ’s bottomline. In comparison, there was merely an estimated RM3m contribution in 1H20. On a positive note, these are essentially a delay in revenues rather than outright cancellation.

Earnings revision. We revise down our FY20F/21F earnings by 34%/8% to factor in the sharply lower developer contribution, lower EPC contract flows as well as Ranhill’s Covid-19 monetary contribution in FY20F. The revision for our FY21F earnings mainly reflects the exclusion of joint-billing and preliminary sewerage integration earnings assumptions, as this is likely to be pushed out given little regulatory progress on this front so far

Source: MIDF Research - 27 Aug 2020