SPAN has announced that the water tariffs for domestic users in the Peninsular Malaysia and Labuan will increase by an average of RM0.22/m3, effective 1 Feb 2024. In line with the announcement from SPAN, Johor will also raise its domestic water tariff, the first of such in 9 years. We view the changes positively as this will boost RANHILL’s bottom-line and provide more cash flow to invest into lowering its NRW. After adjusting our blended water tariff assumption from RM2.32/m3 to RM2.45/m3, we increase our FY24/FY25 earnings forecasts by 3.5%/3.4% respectively. We raise our TP to RM1.07/share (previously RM0.96/share) based on SOP valuation. Downgrade to Sell as the share price has moved ahead of its fundamentals.

Domestic Water Tariff Hike From 1 Feb 2024

The National Water Services Commission (SPAN) has announced that the water tariffs for domestic users in the peninsular Malaysia and Labuan will increase by an average of RM0.22/m3, effective 1 Feb 2024. SPAN also said the water tariff adjustments, governed by the Tariff Setting Mechanism (TSM), will standardise the tariff structure and components for the states in the peninsula and Labuan, with a 3- year review cycle to maintain consistency in fee determination. SPAN added that this increase in water tariff is still insufficient to cover the actual cost of providing water supply services, amounting to RM1.75/m3 based on the actual record of 2022.

In line with the announcement from SPAN, Johor will also raise its domestic water tariff, the first of such in 9 years (Figure 1). The average water tariff for the first 35m3 per month will increase by 22.9% or RM0.29/m3.

Our Take

We are not surprised by the tariff adjustment as the government has been hinting at raising the water tariff for more investments to upgrade the existing water infrastructure. The tariff hike is timely considering that Johor’s domestic water tariff was last adjusted in 2015.

We view the changes to domestic water tariff positively as this will boost RANHILL’s bottom-line and provide more cash flow to invest into lowering its non-revenue water (NRW). Additionally, the new TSM, which comes with a three-year review cycle, is also a positive news as the water tariff is now expected to be adjusted every 3 years in line with inflation.

Impact

After adjusting our blended water tariff assumption from RM2.32/m3 to RM2.45/m3, we increase our FY24/FY25 earnings forecasts by 3.5%/3.4% respectively.

Valuation

We raise our target price to RM1.07/share (previously RM0.96/share) based on sum-of-parts (SOP) valuation. We downgrade RANHILL to Sell as the share price has moved ahead of its fundamentals. RANHILL is currently trading at 30x FY24 EPS and offers a dividend yield of c.2%.

Source: TA Research - 18 Jan 2024