• BUY, new SOP MYR1.09 TP from MYR0.72, 22% upside with c.3% yield.We expect Ranhill Utilities’ 3Q23 core profit grow by 15-25% YoY to a rangeof MYR10.7m-11.7m. The estimated growth largely stems from the hike innon-domestic water tariffs in Johor which took effect from January, coupledwith higher progress billings of its engineering services jobs. We favour thestock, as its valuation remains undemanding – RAHH is trading at a FY24FEV/EBITDA of 2.3x, ie -1SD from its 5-year EV/EBITDA mean, with growthprospects underpinned by its defensive nature (water and power segment).

• Johor’s property outlook is backed by the Johor Bahru-Singapore RapidTransit System Link project and the plans expediting the progress of theJohor-Singapore Special Economic Zone. We expect water consumptionfrom industrial, commercial and residential properties to rise in the yearsahead. Also, a proposal submitted to Cabinet on a mechanism thateliminates ministerial approval for tariff adjustments may enable water tariffs – including domestic ones (last hike for domestic users was in Aug 2015, at 33% for the first 20 cu m) to be managed by water supply operators.

• The entry of YTL Power (YTLP MK, BUY, TP: MYR2.43) as RAHH’ssubstantial shareholder (at 18.9%) is a strategic fit for YTLP, given itsexperience in water treatment and power generation (which RAHH is alsoinvolved in). Moreover, YTLP’s plan to venture into data centres in Johorcould spur water demand for data centre cooling systems, in our view. Ingeneral, 1MW of data centre capacity may require c.25.5k cu m of waterper year. As such, a main potential beneficiary would be RanhillSAJ, the sole and exclusive provider of source-to-tap water supply in Johor. Note that water consumption from non-domestic users in Johor was 6.3% YoY higher in FY22 at 195.7m cu m, after two years of decline. While the likelihood of YTLP increasing its stake in RAHH is hard to ascertain, we think that any potential of it happening in the future should not be ruled out.

• We make no changes to FY23F earnings but increase FY24-25F netprofit by 2-3% to pencil in higher forecasted water consumption. We alsorevise our CoE assumption for our DCF valuation of RAHH’s water segmentto 8% from 9%, to reflect the improved operating conditions in Johor. Weare also taking the opportunity to lower the discount to our SOP valuation,in light of the National Energy Transition Roadmap which focuses on carboncapture and storage (CCS) and solar power which could potentially benefitRAHH. RAHH’s engineering services arm is already involved in theKasawari CCS project, in addition to its 50MW LSS4 solar farm in Bidor,Perak which is expected to begin commercial operations by end-2023.Following these adjustments, we derive a new TP of MYR1.09, which alsohas an ESG premium of 4% baked in, as per our in-house methodology.

• A near-term catalyst is the possibility of RAHH being shortlisted as a solarpower producer via the remaining 263.6MW of solar power capacity underthe Corporate Green Power Programme (CGPP). Downside risks:Substantially lower-than-expected water consumption.

Source: RHB Securities Research - 9 Nov 2023