KEY INVESTMENT HIGHLIGHTS

• 9M20 earnings within our estimate but below consensus

• Sequential earnings improvement given absence of B40 discounts and recovery in water consumption

• Negotiating lower leases as relief measure in place of a tariff hike for water operations

• Extension of RP1 concession and venture into source-to-tap water supply in Indonesia are key potential catalysts

• BUY maintained at unchanged TP of RM1.25

Sequential recovery. Ranhill reported a net profit of RM15m, which brought 9M20 earnings to RM47m. This is within our expectation but below consensus, accounting for 73% and 58% of estimates respectively.

Key takeaways. 3Q20 earnings improved sequentially as 2Q20 was impacted by B40 discounts (RM2.8m) and given a recovery in water consumption. Year-on-year, earnings were down 23%yoy given lower developer contribution, Covid 19 contribution expenses and lower power earnings from lower CRF.

Tariff hike could take longer than expected. Ranhill is due to enter its OP5 from January 2021. While new capex are likely to be included in OP5 business plan, especially related to NRW reduction measures (SAJ is targeting to reduce NRW to 20.8% by 2022), to be realistic, we think a tariff hike for SAJ may take longer than expected given the change in Government and the Covid19 pandemic impact on the economy and society. Our projections already conservatively assume a tariff hike is pushed out to FY22F. We understand that SAJ may potentially negotiate for lower leases as a relief measure in place of a tariff hike to ensure its regulated 9% net margin remains intact, which should be positive for the group.

Power division. Ranhill is proposing an extension of the existing RP1 concession (due to expire 2029) – negotiations have commenced though not outcome is forthcoming yet at this juncture. We also understand that Ranhill is exploring revising the Tawau geothermal project – to recap, the previous Tawau geothermal project (via Ranhill’s 27%stake in Tawau Green Energy Sdn Bhd) entailed a capacity of 30MW, but the project faced hurdles given financial hurdles faced by one of the previous partners, leading to delays in development of the site. The project was eventually terminated by MESTECC in 2018. Any development on this front is positive given potential expansion in the group’s power portfolio and in gaining exposure to RE.

Venturing into water supply in Indonesia. Ranhill recently formed a consortium with several strategic partners to bid for the development of a source-to-tap project for 5 regions in Indonesia namely DKI Jakarta, Bekasi City, Bekasi Regency, Karawang Regency and Bogor Regency involving potential gross capacity of ~860mld. The group has submitted the feasibility studies to the authorities and is awaiting the outcome and approval, before a bidding process is launched, potentially in 1H21. This project could provide a meaningful boost to the group, potentially expanding its existing sourceto-tap water capacity (which is currently run by SAJ for the state of Johor) by over 40%.

Recommendation. Maintain BUY on Ranhill at unchanged SOP-derived TP of RM1.25. Potential catalysts: (1) Expansion into Indonesia source-to-tap water supply (2) Potential extension of RP1 concession (3) Scheduled rate hike/lease re-negotiation for Johor water operations.

Source: MIDF Research - 27 Nov 2020