Water tariff hike a positive development for Ranhill — Analysts
KUCHING: The domestic water tariff hike will have a positive impact on Ranhill Utilities Bhd (Ranhill) as the hike will boost its bottom-line and provide more cash flow to the company.
Of note, the National Water Services Commission (SPAN) announced that the water tariffs for domestic users in the peninsular Malaysia and Labuan will increase for the first time in almost a decade, by an average of RM0.22 per cubic metre, effective February 1, 2024.
According to reports, the water tariff adjustment is implemented under the tariff setting mechanism (TSM) where the tariff structure and components are standardised for states in the peninsula and Labuan, and it is expected to be reviewed every three years to ensure consistency in the determination of fees.
However, SPAN had pointed out that this increase in water tariff is still insufficient to cover the actual cost of providing water supply services, amounting to RM1.75 per cubic metre based on the actual record of 2022.
Nevertheless, according to TA Securities Holdings Bhd (TA Securities), the increase will still be beneficial for water service providers and operators such as Ranhill.
“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 three years in line with inflation,” it said.
It also noted that it is 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.
Sharing its sentiments, Maybank Investment Bank Bhd’s research team (Maybank IB Research) also pointed out that a synchronised three-year tariff cycle with an electricity passthrough represents significant regulatory progress for the industry.
Specifically on Ranhill, the research team noted that assuming a RM0.22 per cubic metre increase in Ranhill SAJ’s domestic tariff, it estimated an incremental revenue of circa RM95 million annually.
“Separately, a hypothetical RM0.05 per cubic metre electricity surcharge could generate an additional circa RM10 million from the nondomestic segment annually.
“We note that tariff hikes are typically accompanied by higher costs and lease payments to PAAB,” it added.