KUALA LUMPUR (Nov 9): RHB Research has kept its 'buy' call for Ranhill Utilities Bhd and raised its target price to RM1.09 from 72 sen previously, as Ranhill’s valuation remains undemanding.
The research house’s optimism is also driven by Ranhill’s growth prospects given its defensive nature, as it is involved in water and power segments.
“We expect Ranhill Utilities’ 3QFY2023 [for the financial year ended September 30, 2023] core profit to grow by 15-25% year-on-year (y-o-y) to a range of RM10.7 million - RM11.7 million. The estimated growth largely stems from the hike in non-domestic water tariffs in Johor which took effect from January, coupled with higher progress billings of its engineering services jobs,” said RHB Research in a note on Thursday.
A near-term catalyst is the possibility of Ranhill being shortlisted as a solar power producer via the remaining 263.6 megawatt (MW) of solar power capacity under the Corporate Green Power Programme (CGPP), the research outfit added.
RHB Research has maintained its earnings forecast for Ranhill for the financial year ending Dec 31, 2023 (FY2023), but increased its net profit projection for FY2024 and FY2025 by 2% and 3% to account for higher forecasted water consumption.
Hence, it is now anticipating Ranhill to deliver an annual net profit of RM46 million in FY2023 — which is less than half of RM97 million achieved in FY2022 — before generating earnings of RM48 million for FY2024 and RM54 million for FY2025.
It should be noted that Ranhill’s subsidiary RanhillSAJ Sdn Bhd recognised RM142.3 million non-revenue water reduction incentives in FY2022. Meanwhile, Ranhill also made full-year earnings recognition from Ranhill Bersekutu Sdn Bhd and Ranhill Worley Sdn Bhd following the completion of their acquisitions in the third quarter of 2021, its previous bourse filing showed.
Going forward, the research outfit also expects water consumption from industrial, commercial and residential properties to rise in the years ahead as Johor's property is backed by Johor Bahru-Singapore Rapid Transit System Link project and the plans expediting the progress of the Johor-Singapore Special Economic Zone.
On top of that, it said a proposal submitted to the cabinet on a mechanism that eliminates ministerial approval for tariff adjustments may allow water tariffs — including domestic ones — to be managed by water supply operators, which seem to benefit Ranhill.
According to RHB Research, another catalyst is the entry of YTL Power International Bhd as Ranhill’s substantial shareholder at 18.9%), given YTL Power's experience in water treatment and power generation, which Ranhill is also involved in.
“Moreover, YTL Power’s plan to venture into data centres in Johor could spur water demand for data centre cooling systems, in our view. In general, 1MW of data centre capacity may require circa 25,500 cu m [cubic metre] of water per year. As such, a main potential beneficiary would be RanhillSAJ, the sole and exclusive provider of source-to-tap water supply in Johor,” it added.
Ranhill's share price surged 54% or 31.5 sen this month so far to 89.5 sen, its highest in more than three years, following the emergence of YTL Power as its substantial shareholder on Nov 1.
Year to date, the stock has almost doubled from 45.5 sen on Dec 30, 2022.