Review

• Ranhill Utilities Berhad’s (Ranhill) FY22 core profit of RM23.6mn (-23% YTD)  was below our expectations and consensus estimates, accounting for 83%/75%  of full-year forecasts respectively. The variance versus our forecast was largely attributed to unexpected losses at the Energy segment. This was mainly dragged by: (1) lower recognition of energy payment at Ranhill Powertron II plant, and  (2) higher maintenance cost due to a major plant inspection in 4Q22.

• Core net profit excludes, amongst others, chunky exceptional Non-Revenue  Water (NRW) reduction incentive of RM142.3mn received in 4Q22 (net of expenses, including taxes and minority interest).

• To recap, under the 12th Malaysia Plan, state water operators under the  Pendekatan 2 Implementation are allocated total grant amount of RM1.9bn if they exceed respective NRW targets set in 2021-25 (2021: 26.2%). Recall that  NRW comprises water that has been produced or treated, but is lost before it reaches the end-user. In 2021, SAJ managed to achieve 25.1% NRW - thus enabling it to claim 75% of its qualified expenditures.

• QoQ core earnings weakness was due to: (1) loss in Ranhill Water Services Sdn  Bhd in relation to a rehabilitation project of RM7.5mn, and (2) lower profit from Energy segment as described above.

• YTD core profit contraction was largely attributed to: (1) decrease in construction revenue at the Environment segment due to lesser expansion works in China, (2) losses at the Energy segment as detailed above, and (3) higher depreciation. The above more than offset higher contribution from the Services segment whereby profits more than doubled YTD. The latter was underpinned by maiden contributions (start: 3Q21) from newly acquired subsidiaries Ranhill  Bersekutu and Ranhill Worley.

• The Group declared interim DPS of 0.5 sen (4Q21: 0.34 sen) which bring the cumulative FY22 DPS to 0.79 sen (FY21: 1.55 sen).

Impact

• Maintain earnings forecasts.

Outlook

• We believe that FY23 may potentially turn out to be a bumper earnings year for  Ranhill. This is mainly driven by: (1) recovery in Developers’ Contribution, (2)  full-year recognition of water tariff hikes for the non-domestic and special category segments, and (3) increased earnings contribution from Ranhill  Worley. In terms of cashflow, we believe that FY23 cash levels may also be augmented. This is underpinned by receipt of August-December 2022 tariff hikes billed in arrears.

Valuation

• Following receipt of the bumper NRW incentive, we now forecast Ranhill to turn into net cash position in FY23E (previous: net debt). As a result, our Sum-of-Parts (SOP) target price (TP) is raised to RM0.67 (previous: RM0.59). We maintain our Buy recommendation.

Source: TA Research - 27 Feb 2023