• Maintain SELL, with new MYR1.10 TP (from MYR1.15), 26% downside, c.1% FY24F yield. Ranhill Utilities recorded a 1H24 core profit of MYR16.9m (-27% YoY) – missing expectations – making up 36% and 32% of ours and Street’s estimates. The negative deviation was mainly due to the weaker- than-expected performance of the engineering services and power divisions. With hefty valuations in the absence of any sizeable near-term catalyst, we maintain our call on RAHH, which is trading at FY25F P/E of 40.6x, >2SD above its five-year mean P/E. Dividend yields are unattractive at just c.1%.

• For 1H24, the PAT for the water segment dropped slightly by 2% YoY as the higher revenue from the tariff hike for domestic consumers (effective February) was offset by higher amortisation on service concession assets of RanhillSAJ. The engineering services segment saw a larger YoY drop in PAT of 22% in 1H24 due to a reversal of profit for a detail design engineering project awarded by a Brazilian oil and gas producer. Likewise, the power segment recorded a 12% YoY drop in PAT in 1H24 due to derecognition of capacity payment by Ranhill Sabah Energy II plant (related to a failure despatch incident) plus higher maintenance costs.

• While we view YTL Power International (YTLP MK, BUY, TP: MYR6.68) could enhance RAHH’s operational efficiency in the long run by leveraging on its existing experience in the power and water services sector, the only near- term catalyst we see is the plan to supply water to Penang from Perak through the proposed Kerian Integrated Green Industrial Park. RAHH may benefit from such plans via its 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 under a contract worth MYR38.5m.

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

• As results missed expectations, we slash FY24-26 earnings estimates by 12%, 10%, and 7% post earnings adjustments for the power and engineering services division, which was weaker than expected. Therefore, we arrive at a new SOP-derived TP of MYR1.10 (from MYR1.15) which bakes in a 4% ESG premium based on an ESG score of 3.2.

• Risks to our call: Higher-than-expected water consumption and faster-than- expected job replenishment for its engineering services arm.

Source: RHB Research - 15 Aug 2024