Water tariff revision potential catalyst for Ranhill
MIDF Research in a report said it maintained a 'sell' call on Ranhill with a lower target price of RM1.02 per share after trimming its earnings estimates due to the cost overrun at Ranhill Worley Sdn Bhd (RWSB).
'While the entry of a strong controlling shareholder in YTL Power is one that could yield synergistic benefits due to its expertise in the water sector, we view that the strong run-up in Ranhill's share price since April 2024 values it at a stretched 24.2 times of financial year 2026 (FY26) price-to-earnings ratio as compared to a historical mean of 20 times and a compressed dividend yield of only 3.1%,' it noted.
The research house also expects Ranhill SAJ Sdn Bhd to continue contributing strongly to the company's earnings moving forward, attributable to the data centre (DC) growth in Johor and the upcoming economic growth prospects from the Johor-Singapore Special Economic Zone (SEZ) and Special Financial Zone.
'We understand that the group is working closely with YTL Power and the state government in identifying new water resources and in restructuring the tariffs,' added MIDF Research.
Given Ranhill's results underperformance, TA Research said it has trimmed Ranhill's FY25-FY26 earnings by 15% and 1% respectively, mainly to reflect the cost overrun at RWSB.
On the water segment, the brokerage said Johor would benefit from the influx of DC infrastructure, in part, given spillover demand from Singapore.
'As Johor's source-to-tap water supply operator, Ranhill is expected to benefit from increased water demand from DCs for cooling purposes,' it noted.
TA Research also gathered that the National Water Services Commission is currently reviewing water tariff for the non-domestic sector, in particular for high consumption users, including the DC industry.
'Should it materialise, the tariff revision could be a positive catalyst for Ranhill,' TA Research pointed out.
As for the power segment, the research house said Ranhill had proposed an extension to the power purchase agreement for its 190MW Teluk Salut Power Plant beyond its existing concession term that expires in 2029 to address the growing energy demand in Sabah.
Ranhill is also looking to participate in the Corporate Renewable Energy Supply Scheme introduced by the Energy Transition and Water Transformation Ministry (Petra) which allows corporate consumers access to green electricity by procuring green electricity supply directly from a renewable energy producer.
YTL Power, the group's major shareholder, has plans to develop a 500MW solar farm at its YTL Johor Data Centre Park in Kulai. 'We do not rule out possibilities of this project being parked under Ranhill, which could provide another catalyst for the group further out.'
Despite the research house's downward tweak to Ranhill's earnings, it has raised the target price to RM1.40 as 'we reduce the risk premium for 80%-owned Ranhill SAJ Sdn Bhd in our valuations'.
This is on the back of a potentially more favourable regulatory environment, which is more receptive to tariff increases that better reflects industry capex requirements. TA Research said 'In line with this, and following share price retracement in the past week, we upgrade Ranhill to a 'buy' from 'sell' previously.'
Meanwhile, RHB Research said the catalysts for Ranhill include strong water demand in Johor in the coming years backed by industrial investments namely in DCs, manufacturing plants which could be part of the Johor-Singapore SEZ and Petra to introduce a new water tariff category for DCs. The research house, which has a 'buy' call on the stock, has kept its target price at RM1.37.
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