Earnings boost seen for Ranhill
Research house expects water tariff hike next year
PETALING JAYA: Energy and water company Ranhill Holdings Bhd is set to get an earnings boost from next year, following an impending water tariff hike.
MIDF Research said in a report yesterday that subsidiary SAJ Ranhill Sdn Bhd is due for a tariff hike soon as the last one was back in 2015, which saw a 14% hike.
“This will provide a meaningful gap-up in SAJ earnings, estimated from 2019 onwards. Based on the water operating structure, SAJ takes a 9% margin from revenues collected – the bulk of cost being annual lease payments to Pengurusan Aset Air Bhd (for lease of water assets) and bulk water purchase from the state govern- ment.
“We estimate the tariff hike could increase SAJ’s revenue by 11% to RM1.3bil per annum, of which 9% of the incremental revenue, amounting to about RM11mil per annum, will drive a 12% earnings growth for the group in 2019.
The research house said Ranhill is an overlooked, hence under-institutionalised, utilities play with exposures in both the water and power sectors.
“Its balance sheet has been successfully degeared in the past two years, sustainable dividend yields are above industry at a solid 8% (relative to the sector’s average yields of 5%), while a number of development and projects in the pipeline could propel earnings higher in the next few years.
“More importantly, Ranhill is deeply undervalued. One of its most prized assets is SAJ, its water distribution business in Johor, which accounts for 80% of our gross sumof-parts valuation and 60% of group earnings.”
Even as a group, MIDF Research said, Ranhill’s 2019 price-to-earnings (PE) ratio of just 8 times is depressed, relative to the overall Malaysian utilities sector average of 11 times.
“As Ranhill’s earnings are backed by quality, concession based businesses, and considering the depressed valuations it is trading at currently coupled with attractive yields, we see minimal downside to the stock and risk reward is very attractive at current price levels.
“Successful execution of several new power and water projects in the pipeline could drive our target price, with a potential blue-sky target of RM1.50 from the current RM1.15.”
Ranhill saw its net profit for the second quarter ended June 30 rise 6.3% to RM15.4mil on the back of increased contribution from its environment segment.
This was due to the increase in the volume of water consumption in SAJ. The group’s revenue for the period was also up 3.1% to RM379.5mil due to the same reason.