• Downgrade to SELL from Neutral, new MYR1.15 TP from MYR1.06, 27% downside. Ranhill Utilities recorded a 1Q24 core profit of MYR10.3m (down 2% YoY amidst higher minority interests), which made up 22% and 21% of our and Street’s full-year estimates. We deem the results to be in line amidst higher water revenue in subsequent quarters, following the recent domestic tariff hike in February. With hefty valuations in the absence of any sizeable near-term catalyst, we downgrade the stock to SELL. RAHH is trading at a FY25F P/E of 39x, >2SD above its 5-year P/E mean.

• For 1Q24, the adjusted PAT for the environment segment grew by 25% YoY mainly due the tariff hike for domestic consumers for Ranhill SAJ, which took effect from February. Likewise, the engineering services segment saw a 101% YoY adjusted PAT growth due to Ranhill Worley’s higher contribution from chargeable hours on projects – namely Kasawari, and the north field production sustainability offshore compression complexes, etc. Meanwhile, the energy segment recorded a 40% YoY drop in adjusted PAT in 1Q24 due to lower capacity payments made by Ranhill Sabah Energy II plant.

• The only near-term catalyst for RAHH we see is the plan to supply water to Penang from Perak through the proposed Kerian Integrated Green Industrial Park. The company may benefit from such plans via subsidiary Ranhill Water Services, which has clinched water projects beyond Johor – namely the MYR61.5m job to replace old pipes in Kelantan covering a total length of 103km secured in Mar 2022. Other jobs include laying c.52km of new mild steel distribution pipelines throughout the Royal Malaysian Navy base in Lumut via a contract worth MYR38.5m.

• Other developments. The RAHH-led consortium for Indonesia’s Djuanda source-to-tap water project (estimated treatment capacity of 605m litres/day or MLD and capex of USD600m) has resubmitted the feasibility study, resulting in further delays to obtain initiator status. Once accepted, only then can initiator status be granted to this consortium – enabling it to bid for said project via a public tender, with a right-to-match advantage.

• Separately, we also flag the risk of the Sabah State Government’s plan to study the proposal of taking over independent power producers (IPPs) in the state in the long term. RAHH is the largest IPP in Sabah, with a total of 380MW of capacity generated by two existing combined cycle gas turbine power plants – with the power segment contributing c.20% of revenue.

• No changes to our earnings estimates as results are deemed as in line. We take the opportunity to roll forward our valuation base year to FY25F (from FY24F). As a result, we arrive at a new SOP-derived TP of MYR1.15 (from MYR1.06) which bakes in a 4% ESG premium, based on RAHH’s ESG score of 3.2. Upside risks: Higher-than-expected water consumption and faster-than- expected job replenishment for its engineering services arm.

Source: RHB Research - 28 May 2024