• Stay BUY, with new SOP-derived MYR0.68 TP from MYR0.63, 35% upside and 3% yield. We believe Ranhill Utilities will continue charting earnings growth for FY23F with a few developments to watch out for ie the source-to-tap Indonesian project and upcoming 100MW Combined Cycle Gas Turbine or CCGT power plant in Sabah. Valuation is undemanding as the stock is trading at -1SD from its 5-year mean P/E, with earnings growth backed by Johor’s water tariff hike and steady services job replenishment.

• Ranhill SAJ (80%-owned subsidiary of RAHH) will recognise the backdated additional water billings for the Aug-Dec 2022 period in FY23 worth at least MYR10m in revenue – translating into higher earnings in FY23F vs FY24F. Ranhill SAJ recognised MYR142m of non-revenue water (NRW) reduction incentives in FY22 with respect to FY21 – which helped to boost its cash reserves. While RAHH did not qualify for any NRW reduction incentives for FY22, the group is confident to be qualified for the said incentive in FY23F.

• Meanwhile, RAHH’s services segment (17% of FY22 revenue) has an orderbook of MYR862m as at 31 Dec 2022 (three years of earnings visibility). The segment’s tenderbook stands at MYR1.5bn – with 75% of bids under Ranhill Worley likely focused on oil and gas-related contracts. Around MYR540m worth of new contracts were secured in FY22 comprised of local and overseas jobs, and we believe that this momentum will continue in FY23 underpinned by better offshore oil and gas activity, with USD214bn of new project investments lined up globally, according to Rystad Energy.

• Post results briefing, we lower our FY23F-25F earnings by 6-10% to take into account the net effect of higher electricity tariffs and a more conservative water consumption target post-water tariff hike. Valuation wise, we are lowering our discount rate for the water segment’s DCF valuation in our SOP valuation to reflect lower regulatory risks following the recently implemented tariff hike. As a result, we arrive at a slightly higher SOP-derived TP of MYR0.68 (from MYR0.63) after imputing an ESG premium of 2% based on our in-house proprietary methodology.

• Prospects for RAHH include the Indonesian Djuanda source-to-tap water project (estimated treatment capacity of 605m litres/day (MLD) and USD700-800m capex) whereby the final review of the feasibility studies are currently ongoing a review prior to submission to the Indonesia Government – after which an initiator status will be granted to a RAHH-led consortium once accepted and enabling the consortium to bid for the said project via a public tender. Re-rating catalysts for RAHH would be a potential boost in dividend payout in FY23F should the group partly utilise cash proceeds of the NRW reduction incentive coupled with sizeable engineering services job wins, particularly those from overseas that may push total new job wins above our FY23F replenishment of MYR550m.

• 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 - 10 Mar 2023