• Keep BUY and SOP-derived MYR0.55 TP, 19% upside with c.3% yield. Ranhill Utilities’ 80%-owned water operator subsidiary Ranhill SAJ (RSAJ) has begun implementing the new water tariffs effective 1 Jan for non- domestic users. The last water tariff hike took place in 2015 hence, RSAJ’s latest hike is timely in easing pressure on earnings caused by higher lease payments and running costs. Note: RAHH is trading at -1.5SD from its 3- year mean EV/EBITDA.

• Tariff hike details. According to RSAJ’s corporate website, the increases in water tariffs for non-domestic users range between 20 sen and 30 sen/cu m or a 6-10% rise. Meanwhile, the minimum monthly charges for non- domestic users and special segments (which have minimum contributions to RSAJ’s total non-domestic billings) such as houses of worship, welfare institutions, and shipping saw 3%, 129%, and 40% increases (Figure 1). The firm’s move is in line with the water tariff hikes gazetted by the Government for non-domestic users and special categories in West Malaysia and Labuan – effective 1 Aug 2022.

• Impact to RAHH. Post the hike in tariffs, we estimate FY23 to post additional billings of c.MYR30-50m. We also understand RSAJ may recognise differences between old and new tariffs for non-domestic users during Aug-Dec 2022. As such, it is expected to see additional revenues of c.MYR10-20m for this period. Having said that, we make no changes to our earnings estimates pending further clarity from management.

• Sensitivity analysis. Assuming the differences between the old and new tariffs for non-domestic users for the Aug-Dec 2022 period is to be recognised for FY22, we expect full-year earnings to be c.10-20% higher than our current estimates, ie reaching between MYR37m and MYR42m. As for FY23F-24F, earnings could rise by >15% from current projections. Conversely, should the extra billings for Aug-Dec 2022 be booked in FY23, full-year earnings may rise by >20% from the current estimates.

• Still BUY and SOP-derived MYR0.55 TP after imputing an ESG premium of 2% for its 3.10 ESG score, which is based on our in-house proprietary methodology. RAHH’s long-term catalysts include Indonesia’s Djuanda source-to-tap water project (estimated treatment capacity of 605m litres/day or MLD) – the feasibility studies are undergoing review prior to submission to the Indonesian Government – after which initiator status will be granted to a RAHH-led consortium. This status enables the consortium to bid for this project via a public tender with a right-to-match advantage. Another catalyst would be a positive outcome for its bid to develop a 100MW Combined Cycle Gas Turbine plant on Sabah’s west coast.

• Risks to our call: Lower-than-expected water consumption and developer contributions, and failure to secure new contracts under the services arm.

Source: RHB Research - 25 Jan 2023