• BUY, new SOP TP of MYR0.66 from MYR0.76, 35% upside, c.4% yield. 1Q22 core earnings of MYR7.4m (+1% YoY) were below our and Street’s estimates at only 14% and 15% of full-year projections. The negative deviation was mainly on higher-than-expected opex and administrative expenses, which were 28% YoY higher in the quarter. We continue to advocate investors accumulate on share price weakness, as Ranhill Utilities is trading below -1.25SD from its 5-year mean EV/EBITDA while its c.32% FY22F earnings growth will be partly underpinned by the services segment.

• Results review. For 1Q22, the environment segment saw revenue and PAT declines of 2% and 22% YoY on lower contributions from developers to Ranhill SAJ – this was due to less new developments in Johor. The services segment saw a >100% YoY revenue growth to MYR78m in 1Q22, driven by revenue contributions from acquired subsidiaries Ranhill Worley and Ranhill Bersekutu, which were not present in 1Q21. Similarly, the energy segment’s topline expanded 15% YoY on higher energy payment fuel revenues in Ranhill Powertron I and Ranhill Powertron II to compensate for elevated diesel consumption (pass-through costs) during Petronas Gas’ (PTG MK, NEUTRAL, TP: MYR17.37) curtailment in this period.

• FY22F-24F earnings are cut by 15%, 14%, and 6% after factoring in lower earnings contributions from the water segment. While the 1Q22 core profit of MYR7.4m only makes up 16% our latest FY22F earnings, we think there will be a gradual increase in non-domestic commercial consumption in Johor for the subsequent quarters – in light of Malaysia’s transition into endemicity. Post earnings revisions and rolling forward our valuation base year to FY23, we arrive at a new SOP-derived MYR0.66 TP after imputing an ESG premium of 2% for Ranhill’s 3.10 ESG score – based on our in-house proprietary methodology. We expect a stronger FY22F earnings growth of 32%, partly driven by the revenue streams from the services segment, ie Ranhill Bersekutu and Ranhill Worley. We gathered that Ranhill Worley – together with Malaysia Marine & Heavy Engineering (MMHE MK, NEUTRAL, TP: MYR0.42) – was successful in a bid for Petronas’ parallel front-end engineering and design works for the Kasawari Phase 2 project, which should further support earnings. Potential rerating catalysts: i) Higher than-expected rate hikes for Ranhill’s Johor water operations, ii) positive outcome for its ASEAN expansion plans (ie source-to-tap water project in Indonesia), and iii) project wins related to water and renewable energy.

• Risks to our call: Licensing risks, timeliness of tariff revisions, lower-than-expected water consumption and developer contributions, escalating costs for its water business, and Ranhill failing to meet the capacity and energy payment conditions for both its power plants.

Source: RHB Research - 1 Jun 2022