Keep BUYandSOP-based MYR0.76 TP, 55% upside and 5% yield. Ranhill Utilities via subsidiary, Ranhill Water Services (RWS), had accepted a letter of acceptance from Pengurusan Aset Air Berhad (PAAB). We believe the contract awarded worth MYR61.5m, with works to be undertaken from 29 Mar 2022 to 28 Mar 2024, will contribute positively to overall earnings. Its 11.5x FY22F P/E is trading below its 5-year historical mean of 20.8x, indicating undemanding valuation.
Scope of work. The main scope of work, amongst others, includes: i) Replacement of existing distribution and communication pipes, ii) establishment of new District Metering Areas (DMAs), iii) installation of pressure reducing valves (PRV) system and flowmeters at reservoir outlet, and iv) testing and commissioning works. These works will take place in the district of Kota Bharu Timur, Machang, Tanah Merah and Kuala Krai covering a total length of 103km for pipe replacement works.
Our view. We foresee minimal execution risks by RWS as it has previously secured two of PAAB’s pipe replacement contracts through a competitive open tender exercise in 2019. Apart from that, RWS has been actively involved in Kelantan’s water supply projects, and since 2012, it has secured three non-revenue water (NRW) management contracts from Air Kelantan SB (AKSB). As such, this latest win solidifies RWS’ presence in Kelantan and strengthen RAHH’s credentials as a holistic NRW management specialist in the country.
Earnings estimates and valuation. We raise our FY22F-FY24F earnings by 7%, 13% and 2% after imputing contributions from the latest contract win.Despite the adjustment in earnings, our SOP-derived TP is maintained at MYR0.76 as the changes in the FCFE from its water business is minimal. Our SOP-derived TP was also arrived after imputing an ESG premium of 2% for its 3.10 ESG score, based on our in-house proprietary methodology. We expect a >50% FY22F net profit growth, driven by new revenue streams from the service segment (Ranhill Bersekutu and Ranhill Worley). Potential rerating catalysts: Higher-than-expected rate hikes for its Johor water operations, positive outcome from its ASEAN expansion plans, and project wins related to water and renewable energy.
Risks to our call: Licensing risks, timeliness of tariff revisions, lower-than- expected water consumption and developer contributions, escalating costs for its water business, and RAHH failing to meet the capacity and energy payment conditions for both its power plants.
