Finally in place

The implementation of the long-overdue tariff hike for the non-domestic segment is an important catalyst, and restores some degree of financial sustainability to Ranhill and the industry. The next step in the regulatory reform journey would be a more rigorous adherence to the tariff framework (like electricity and gas utilities). Reiterate BUY with an unchanged MYR0.60 SOP-based TP.

Hike for non-domestic users

RSAJ has announced on its website that it has begun implementing the previously-gazetted (in July 2022) tariff adjustments for the non-domestic segment. The rate for the first 35m3 consumed monthly is raised to MYR3.10/m3 (from MYR2.80/m3), while that of subsequent consumption is raised to MYR3.50/m3 (from MYR3.30/m3). Separately, the minimum monthly charges for both the religious institutions and shipping categories have also been raised (tariff for both are nevertheless unchanged).

Reform journey just beginning

The quantum of the tariff hike is in line with the average MYR0.25/m3 increase announced by the government last year. This tariff hike is long overdue in our view, with the previous tariff adjustment being in 2015, or 3 operating periods ago. With financial sustainability of the water industry among one of the Ministry’s main agenda, a more rigorous adherence to the tariff framework should help improve the overall financial health of water operators, in our view.

Earnings maintained for now

Our earnings forecasts and MYR0.60 TP (derived from a sum-of-parts with RSAJ, RP1 and RP2 valued on DCF) are unchanged for now, pending further updates from management. Our forecasts have incorporated a MYR0.15/m3 hike (+4.6%) in RSAJ’s average non-domestic tariff in 2023. Every MYR0.05/m3 increase in average non-domestic tariff would raise annual net profit by c.MYR6m.

Source: Maybank Research - 19 Jan 2023