• BUY, new SOP-based MYR0.63 TP from MYR0.55, 41% upside with c.3% FY23F yield. FY22 core profit of MYR30.2m (-1% YoY) accounted for 89% and 96% of our and Street’s full-year projections. The negative deviation was partly due to higher-than-expected operating expenses. Valuations are undemanding – this counter is trading below -1.5SD from its 5-year mean P/E – with earnings growth backed by the water tariff hike in Johor and higher recognition from engineering services jobs, eg the Kasawari Carbon Capture Storage project.

• For FY22, the adjusted PAT for the environment segment expanded >100% YoY, mainly due to the recognition of the non-revenue water reduction incentive received by Ranhill SAJ amounting to MYR142.3m. Meanwhile, the services segment saw a 35% YoY adjusted PAT decline to MYR27.9m in FY22 (FY21: MYR43.2m), mainly on the reversal on the deferred tax asset in Ranhill Worley recognised in the prior year – offsetting the 55% YoY growth in revenue. Its energy segment’s revenue expanded 19% YoY on higher energy payment fuel revenue in Ranhill Powertron I and II to compensate the higher diesel consumption (cost pass-through) during Petronas Gas’ curtailment during the period, in addition to higher recognition of the Large Scale Solar 4 (LSS4) construction revenue.

• We lift FY23F-24F earnings by 33% and 6% to factor in: i) The additional water billings in arrears for non-domestic users for Aug 2022 to Dec 2022 to be recognised in FY23 (which was clarified by management post results release), and ii) higher developer’s contribution for its water segment. We also roll forward our valuation base to FY24F. As a result, we arrive at a new SOP-derived TP of MYR0.63 from MYR0.55 after imputing an ESG premium of 2%, based on our in-house proprietary methodology. We also introduce our FY25F numbers, with an orderbook replenishment assumption for its services segment of MYR550m.

• Long-term catalysts. These include the Indonesian Djuanda source-to-tap water project (estimated treatment capacity of 605m litres per day and USD700-800m in capex) whereby the final review of the feasibility studies are ongoing, prior to the submission to the Indonesia Government – after which an initiator status will be granted to a Ranhill Utilities-led consortium once accepted. The initiator status enables the consortium to bid for the said project via a public tender with a right-to-match advantage. Another catalyst would be a positive outcome for its bid for the development of the 100MW combined cycle gas turbine plant at Sabah’s west coast (outcome to be known after 1Q23). These have yet to be imputed in our earnings forecast.

• 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 - 27 Feb 2023