This article first appeared in The Edge Financial Daily on November 15, 2018
Ranhill Holdings Bhd
(Nov 14, RM1.18)
Maintain buy with an unchanged target price (TP) of RM1.30: Ranhill’s nine months ended Sept 30, 2018 (9MFY18) revenue, earnings before interest, taxes, depreciation and amortisation (Ebitda) and earnings before interest and tax of RM402 million, RM87 million and RM74million respectively were spot-on, accounting for 75% of our 2018 financial year (FY18) forecasts. However, reported net profit was impacted by an increase in concession unwinding interest charges. As a result, 9MFY18 earnings accounted for 67% of our full-year forecast, technically, falling short of expectations. A higher two sen per share interim dividend was declared.
The unwinding of interest charge relates to Ranhill SAJ Sdn Bhd’s service concession obligation, and tends to be front-loaded and tapers off over the concession period — in this case, Ranhill SAJ’s three-yearly water operator licence which was renewed effective January 2018. Since the licensing regime is short compared to a typical concession, the impact of unwinding of interest can be quite pronounced.
Given the imbalance in recognition of unwinding of interest charges, that is FY17 reflected the final year of Ranhill’s operating period 3 hence is the lowest in that licensing cycle whereas FY18 reflects the first year of its operating period 4 hence is significantly higher; reported earnings showed a sharp 35% year-on-year (y-o-y) fall. Revenue and Ebitda actually grew some 5% y-o-y- and 10% y-o-y reflecting Ranhill’s improved core operating performance driven by lower operating and maintenance cost for its power unit and an increase in consumption for Ranhill SAJ.
Our net profit forecast is tweaked lower by 13% and 10% over FY18 and FY19 for adjustments of unwinding of interest assumptions but this does not impact our sum of parts-based valuation. Our revenue and earnings before interest and tax forecasts remain unchanged over the period. More importantly, our “buy” thesis premised on a potential rate hike which accounts for the bulk of our FY19F growth, takeover of Johor sewerage operation which could drive a 30% to 40% earnings gap-up and entry into renewable energy via its geothermal development, remains intact.
Our TP still conservatively excludes potential earnings contribution from water-sewerage operation integration, the RM500 million national non-revenue water (NRW) programme and the Tawau Geothermal energy project, which could drive our valuations higher to RM1.60 per share. — MIDF Research, Nov 14