Ranhill Utilities’ (RAHH MK) 3Q23 core profit is expected to grow by 15-25% YoY to a range of MYR10.7m-11.7m.

RHB Research cited today (Nov 9) that 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.

RHB favours the stock, as its valuation remains undemanding – RAHH is trading at a FY24F EV/EBITDA of 2.3x, ie -1SD from its 5-year EV/EBITDA mean, with growth prospects underpinned by its defensive nature (water and power segment).

Johor’s property outlook is backed by the Johor Bahru-Singapore Rapid Transit System Link project and the plans expediting the progress of the Johor-Singapore Special Economic Zone.

RHB expects water consumption from industrial, commercial and residential properties to rise in the years ahead. Also, a proposal submitted to Cabinet on a mechanism that eliminates ministerial approval for tariff adjustments may enable water tariffs – including domestic ones (last hike for domestic users was in Aug 2015, at 33% for the first 20 cu m) to be managed by water supply operators.

The entry of YTL Power (YTLP MK, BUY, TP: MYR2.43) as RAHH’s substantial shareholder (at 18.9%) is a strategic fit for YTLP, given its experience in water treatment and power generation (which RAHH is also involved in).

Moreover, YTLP’s plan to venture into data centres in Johor could spur water demand for data centre cooling systems, in RHB’s view.

In general, 1MW of data centre capacity may require c.25.5k cu m 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.

Note that water consumption from non-domestic users in Johor was 6.3% YoY higher in FY22 at 195.7m cu m, after two years of decline.

While the likelihood of YTLP increasing its stake in RAHH is hard to ascertain, RHB thinks any potential of it happening in the future should not be ruled out.

RHB makes no changes to FY23F earnings but increase FY24-25F net profit by 2-3% to pencil in higher forecasted water consumption. They also revised their CoE assumption for their DCF valuation of RAHH’s water segment to 8% from 9%, to reflect the improved operating conditions in Johor.

RHB is also taking the opportunity to lower the discount to its SOP valuation, in light of the National Energy Transition Roadmap which focuses on carbon capture and storage (CCS) and solar power which could potentially benefit RAHH.

RAHH’s engineering services arm is already involved in the Kasawari CCS project, in addition to its 50MW LSS4 solar farm in Bidor, Perak which is expected to begin commercial operations by end-2023.

Following these adjustments, RHB derived a new TP of MYR1.09, which also has an ESG premium of 4% baked in, as per their in-house methodology.

A near-term catalyst is the possibility of RAHH being shortlisted as a solar power producer via the remaining 263.6MW of solar power capacity under the Corporate Green Power Programme (CGPP).

Downside risks: Substantially lower-than-expected water consumption.

RHB maintains a BUY call with a new SOP MYR1.09 TP from MYR0.72, 22% upside with c.3% yield.