KEY INVESTMENT HIGHLIGHTS

• In a latest announcement, Ranhill clarifies that approval to undertake due diligence on IWK is still pending

• This is a setback, but we remain hopeful of further progress

• Notwithstanding latest developments, asset-light model for water supply has shown relative progress and integration of sewerage-water supply is a natural extension, in our view

• No impact to projections from the latest string of announcements; BUY maintained at unchanged TP of RM1.25

What’s new? In a follow-up announcement, Ranhill clarified that it has yet to receive the letter from the Minister of Finance Inc (MoF) for a due diligence exercise on Indah Water Konsortium (IWK) and that it will make an announcement upon receiving the letter. While this is a setback, we remain hopeful of further progress of the water-sewerage integration drive.

Due diligence required to finalize proposal. To recap (based on details of the earlier announcement), Ranhill had sent in a proposal to MoF back in June, for a restructuring of IWK. The proposal involved, among others, the disposal by MoF of its interest in IWK, whereby a due diligence exercise will enable Ranhill to access information necessary to finalise the proposal.

No impact to our projections. There is no impact to our earnings projection or TP from this latest development as we have not factored in any potential impact from the earlier announcement, given that it is still at a very early stage.

Nonetheless, we still think Ranhill is well positioned as a proxy to a water-sewerage integration exercise given its strong track record in water supply operations locally and wastewater management in Thailand and China. Notwithstanding the latest developments, we still think that: (1) The asset-light model adopted in the water supply industry has driven relative progress in improving operator sustainability and infra improvement (2) An integration of sewerage into water supply operations is a natural extension, as the former is a necessary service complementing the latter, and one which could also create an alternative source of non-potable water (3) A tariff mechanism that can better reflect cost recovery is critical in underpinning sustainability of the sewerage sector.

Recommendation. Maintain BUY on Ranhill at unchanged SOPderived 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/potential lease re-negotiation for Johor water operations. (4) Progress in water-sewerage integration.

Source: MIDF Research - 4 Dec 2020