• Maintain BUY, new MYR0.72 TP (SOP) from MYR0.75, 21% upside, c.4% yield. Ranhill Utilities’ 1Q23 core profit of MYR11.1m (+61% YoY) was below our estimates but met Street’s – making up 19% and 21% of full- year projections. The negative deviation was partly due to higher-than- expected cost of sales. Valuations are undemanding as the stock is trading below -1.5SD from its 5-year mean EV/EBITDA, with prospects backed by its defensive nature (water segment) and higher recognition from engineering services jobs as it moves along the S-curve.

• For 1Q23, adjusted PAT for the environment segment expanded >100% YoY mainly due to the higher water billings received by Ranhill SAJ, following January’s tariff hike. The services segment saw a 60% YoY adjusted PAT growth to MYR12.2m in 1Q23 (1Q22: MYR7.6m), mainly due to higher progress billings from its newly secured projects under Ranhill Worley. The energy segment’s adjusted PAT also expanded >50% YoY underpinned by higher demand for electricity.

• We cut FY23F-25F earnings estimates by 11%, 9%, and 9% as we tweak our cost assumptions upwards. We expect stronger earnings in the coming quarters due to: i) Recognition of backdated billings of the water tariff hike from Aug-Dec 2022 in 1HFY23, and ii) increased recognition of its engineering services projects such as the MYR210m detailed engineering design job for Saipem in Qatar. All in, we arrive at a new SOP-derived TP of MYR0.72 after imputing a 4% ESG premium based on a revised ESG score of 3.2 (from 3.1).

• Prospects for RAHH include the Indonesian Djuanda source-to-tap water project (estimated treatment capacity of 605m litres/day and USD700-800m capex), whereby the RAHH-led consortium may participate in a public tender via an initiator status once feasibility studies are approved. Rerating catalysts include a potential boost in FY23F dividend payout if RAHH partly utilises cash proceeds from the non-revenue water reduction incentive in FY22, coupled with opportunities to participate in more power plant projects in Sabah with 200MW of generating capacity expected to come on stream in 2024 and 2025. RAHH has two existing combined-cycle gas turbine (CCGT) power plants with a capacity of 190MW, in addition to the latest bid secured in March for a 100MW CCGT in 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.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. We assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note Envisioning a Better Future.

Source: RHB Research - 30 May 2023