Ranhill Utilities’ 80%-owned water operator subsidiary Ranhill SAJ (RSAJ) has begun implementing the new water tariffs effective 1 Jan for non-domestic users. The last water tariff hike took place in 2015. In RHB Research’s company update on Ranhill Utilities, it said that, RSAJ’s latest hike is timely in easing pressure on earnings caused by higher lease payments and running costs. Notably, Ranhill Utilities is trading at -1.5SD from its 3-year mean EV/EBITDA.
Tariff hike details. According to RSAJ’s corporate website, the increases in water tariffs for non-domestic users range between 20 sen and 30 sen/cu m or a 6-10% rise. Meanwhile, the minimum monthly charges for non-domestic users and special segments (which have minimum contributions to RSAJ’s total non-domestic billings) such as houses of worship, welfare institutions, and shipping saw 3%, 129%, and 40% increases. The firm’s move is in line with the water tariff hikes gazetted by the Government for non-domestic users and special categories in West Malaysia and Labuan – effective 1 Aug 2022.
Impact to Ranhill Utilities. Post the hike in tariffs, The research house estimates FY23 to post additional billings of c.MYR30-50 million. It is also understood RSAJ may recognise differences between old and new tariffs for non-domestic users during Aug-Dec 2022. As such, it is expected to see additional revenues of c.MYR10-20 million for this period. Having said that, RHB Research makes no changes to its earnings estimates pending further clarity from management.
Sensitivity analysis. Assuming the differences between the old and new tariffs for non-domestic users for the Aug-Dec 2022 period is to be recognised for FY22, the research house expects full-year earnings to be c.10-20% higher than its current estimates, ie reaching between MYR37m and MYR42 million. As for FY23F-24F, earnings could rise by >15% from current projections. Conversely, should the extra billings for Aug-Dec 2022 be booked in FY23, full-year earnings may rise by >20% from the current estimates.
Hence, RHB Research has reiterated its BUY rating on Ranhill Utilities and SOP-derived target price (TP) of MYR0.55 after imputing an ESG premium of 2% for its 3.10 ESG score, which is based on its in-house proprietary methodology.
Ranhill Utilities’s long-term catalysts include Indonesia’s Djuanda source-to-tap water project (estimated treatment capacity of 605m litres/day or MLD) – the feasibility studies are undergoing review prior to submission to the Indonesian Government – after which initiator status will be granted to a Ranhill Utilities-led consortium. This status enables the consortium to bid for this project via a public tender with a right-to-match advantage. Another catalyst would be a positive outcome for its bid to develop a 100MW Combined Cycle Gas Turbine plant on Sabah’s west coast.
Risks identified are lower-than-expected water consumption and developer contributions; and failure to secure new contracts under the services arm.
