KUALA LUMPUR: Maybank Investment Bank (IB) Bhd maintained its "Sell" call on Ranhill Utilities Bhd following an impending water tarriff hike, believing that its recent share price rally has priced in the potential boost to earnings.
Maybank IB has set its target price for Ranhill Utilities at 70 sen, an almost 37 per cent discount to the RM1.11 it is trading at now.
Suruhanjaya Perkhidmatan Air Negara (SPAN) has announced that water tariffs for the domestic segment in Peninsular Malaysia and Labuan will be raised by an average of RM0.22 per cubic metre from Feb 1, 2024.
"The substantial increase in share price over recent months indicates that the tariff hike has already been factored in and may not offer further upside potential," Maybank IB research said.
Maybank IB said this adjustment would lead to monthly bill hikes ranging from RM1.60 and RM8.00 for households consuming 20/m3 a month.
The increase includes an electricity surcharge ranging from RM0.02/m3 to RM0.10/m3, varying by state and subject to annual review.
"This surcharge is implemented to offset operators' electricity costs and is applicable to all users, including those in the non-domestic segment."Specific tariff details for individual states are yet to be disclosed.
Assuming a RM0.22/m3 increase in Ranhill SAJ's (RSAJ) domestic tariff, an estimated additional annual revenue of approximately RM95 million is anticipated.
"Additionally, a hypothetical RM0.05/m3 electricity surcharge could generate around RM10 million annually from the non-domestic segment," it added.
Maybank IB pointed out that tariff increases typically coincide with higher expenses and lease payments to Pengurusan Aset Air Bhd (PAAB).
According to the bank-backed research firm, the introduction of a synchronised three-year tariff cycle featuring an electricity pass-through marks substantial regulatory progress for the industry.
"Although the net profit forecasts remain unchanged, and the target price is RM0.70 based on a sum-of-parts valuation involving RSAJ and power plants using discounted cash flow (DCF), Ranhill's current valuations are perceived as elevated."The probability of a general offer in the short term is assessed to be low," it added.