• BUY, new SOP-based MYR0.60 TP from MYR0.67, 36% upside with c.4% yield. Ranhill Utilities’ 1H22 core earnings of MYR17.3m (+8% YoY) are below our estimates (37% of our full-year forecast) but met the Street estimate (47%). The negative deviation was partly due to higher maintenance expenses, particularly for its energy segment (+38% YoY). We continue to advocate that investors accumulate on share price weakness, as the stock is trading below -1.5SD from its 5-year mean EV/EBITDA while its venture in Indonesia is progressing positively.

• 1H22 results review. For 1H22, the environment segment booked revenue and PAT declines of 2% YoY and 12% YoY, due to a lower contribution from developers to its subsidiary, Ranhill SAJ, as new development activities in Johor decreased. Meanwhile the services unit’s revenue surged by >50% YoY to MYR78m in 1H22, driven by contributions from the acquired subsidiaries (Ranhill Worley and Ranhill Bersekutu) that were not present in 1H21. Similarly, the revenue of the energy segment expanded 33% YoY, on a higher energy payment fuel revenue at Ranhill Powertron I and II – and this offset the higher diesel consumption (pass-through costs) during Petronas Gas’ curtailment during the period.

• We cut FY22-24F earnings by 14%, 14% and 7% after dialling down our water consumption assumptions for the water segment. Post earnings revision, we arrive at a new SOP-derived TP of MYR0.60 (previously MYR0.67) after imputing an ESG premium of 2% for its 3.10 ESG score, based on our in-house proprietary methodology.

• Looking ahead, we view that its services segment should continue to clinch new jobs related to front-end engineering design work, after being awarded such jobs for the Kasawari Carbon Capture and Storage project and Maleic Anhydride refiner and briquetting plant. An issue worth highlighting is the water tariff hike to MYR0.25/cu m on average, as announced by the Government, for non-domestic users in West Malaysia and Labuan effective 1 Aug. Ranhill SAJ has not yet disclosed the magnitude of the tariff hike but we think that it should be lower than MYR0.25/cu m – as the tariff in Johor is one of the highest in the country. Assuming that a hike of MYR0.20/cu m for non-domestic users by Ranhill SAJ results in a 3.4% increase in overall tariffs, it could result in an earnings accretion of c.MYR6m to the group’s FY23 overall core net profit (full-year impact). Potential rerating catalysts: Higher than-expected rate hikes for its Johor water operations and a positive outcome for its source-to-tap water project in Indonesia whereby one public consultation for Kota Bekasi has been completed while another three are in active negotiations.

• Downside 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 - 29 Aug 2022