• Maintain BUY and SOP-based MYR1.09 TP, 20% upside with c.3%yield. Ranhill Utilities’ 9M23 core profit of MYR33.4m (+25% YoY) met ourand Street estimates – at 73% and 72% of full-year projections. Much of thegrowth came from higher profit recognition from the engineering servicesarm. We like the stock, as it is trading at an undemanding -1SD below the5-year EV/EBITDA mean, with growth prospects underpinned by itsdefensive nature (water segment) and higher recognition from engineeringservices jobs as this division moves along the S-curve.

• For 9M23, the environment segment saw a 10% YoY expansion inrevenue due to the hike in non-domestic water tariffs in January for itssubsidiary, Ranhill SAJ. Nevertheless the adjusted PAT for 9M23 of thesegment declined by 6% YoY due to the increase in the new imbalance costpass-through or ICPT rate, higher maintenance cost for non-revenue watermitigation, and higher chemicals usage amid higher production volume.Meanwhile, the services segment saw a 66% YoY adjusted PAT growth toMYR43.5m in 9M23 (9M22: MYR26.2m), mainly due to higher progressbillings from its newly secured projects under Ranhill Worley. Likewise, theenergy segment’s adjusted PAT expanded >100% YoY in 9M23 due toprofit recognition from the Ranhill Solar I solar farm in Bidor, Perak.

• No changes to estimates, as results are in line. Therefore, our SOPderived TP of MYR1.09 remains unchanged. Our TP also has an ESGpremium of 4% imputed. We believe that RAHH’s domestic growthprospects lie in the National Energy Transition Roadmap or NETR, whichfocuses on carbon capture and storage (CCS) and solar power – this couldbenefit RAHH as the group targets to achieve 1,000MW of energygenerating capacity by 2027. RAHH’s engineering services arm is alreadyinvolved in the Kasawari CCS project, in addition to its 50MW LSS4 solarfarm in Bidor, Perak. We also view RAHH to be a Johor thematic play inlight of the anticipated growth in data centres and property projects whichmay further spur the demand for water.

• A cross-border opportunity would be RAHH’s potential participation inthe Indonesian Djuanda source-to-tap water project (estimated treatmentcapacity of 605m litres per day, whereby the RAHH-led consortium mayparticipate in a public tender via an initiator status once feasibility studiesare approved). Moreover, the recent memorandum of understnading signedby RAHH with China Energy International Group to jointly pursue theDjuanda source-to-tap drinking water supply project in Indonesia (Djuandaproject) and other projects in South-East Asia may provide a cushion fromits balance sheet being over-stretched – as the project has an estimatedcapex of c.USD700m-900m.

• Downside risks to our call: Lower-than-expected water consumption anddeveloper contributions, and failure to secure new contracts under theservices arm.

Source: RHB Securities Research - 15 Nov 2023