Ranhill’s 1Q23 result was below our expectation due mainly to higher- than-expected D&A. Ranhill however surprised with an interim dividend for the quarter. We believe the water tariff hike thesis has largely played out given the share price run-up in the past year. Downgrade to HOLD (from BUY) with an unchanged MYR0.65 SOP-based TP. We prefer YTL Power (YTLP MK, BUY, CP: MYR1.30, TP: MYR1.50) in the utilities space.
Ranhill’s 1Q23 net profit of MYR11m (+51% YoY, -85% QoQ) represents 15%/21% of our/consensus full-year forecasts respectively. The miss relative to our forecast, was mainly due to higher-than-expected D&A. Recall 4Q22 results were boosted by MYR142m of NRW incentive at 80%- subsidiary RSAJ. A 1.5sen DPS was declared, a surprise in terms of timing and quantum. It is unclear if Ranhill intends to maintain a quarterly payout.
In 1Q23, the Environment segment unsurprisingly saw sequentially lower PAT in the absence of the NRW incentive. The non-domestic tariff hike took effect in 1Q23, but this was seemingly accompanied by sequentially higher costs (possibly including D&A). The Energy segment swung back into the black (loss-making in 4Q22) on higher sales and lower maintenance cost. The Services segment also saw sequentially higher PAT on the back of higher project billings.
We lower our FY23/24/25 net profit forecasts by 21%/12%/10% respectively to reflect latest D&A run rates. Our MYR0.65 TP (derived from a sum-of-parts with RSAJ, RP1 and RP2 valued on DCF) is unchanged, and we downgrade to HOLD (from BUY). In our view, further share price upside is contingent upon 1) more rigorous regulatory reforms for the water industry and 2) crystallization and completion of new projects. [Prior:BUY]
Source: Maybank Research - 30 May 2023