Water-related stocks set to gain

The general consensus is that the water tariff re-rating could serve to indirectly enhance the capacities of corporate Malaysia as a whole.

PETALING JAYA: With the National Water Services Commission’s (SPAN) confirmation that the water tariff re-rating is set to come into effect on Feb 1, analysts are of the opinion that sector utility and piping-related counters are set to benefit.

While this may seem obvious, market experts also believe there could be further upside in the value of stocks that may have already experienced a run-up in their share prices prior to the announcement by SPAN yesterday.

In addition, there is also the general consensus that the water tariff re-rating could serve to indirectly enhance the capacities of corporate Malaysia as a whole.

With the density of water being 997 kg per cubic metre (cu m), the new water tariffs will see domestic users in the Peninsular Malaysia and Labuan pay an average of 22 sen more for every cu m starting from Feb 1, or 22 sen more for approximately 1,000 litres of water.

Notably, SPAN had commented yesterday that the increase would still be insufficient to cover the actual cost of providing water supply services, which it said is roughly RM1.75 per cu m based on its records from 2022.

In a research report published on Dec 16 last year, Maybank Investment Bank (Maybank IB) Research had observed that with Peninsular Malaysia’s water reserve margin at the 15.7% level based on 2022 numbers, the portable water sector is still significantly underinvested at the production level.

“That asbestos cement (AC) pipes – most of which are decades old – still comprised a sizeable 29% of the total pipe length in the Peninsular Malaysia in 2022, would also imply that the pipe replacement programme has been slow, with the focus on laying new pipelines in the new areas,” it said.The research unit reported that total AC pipe length was 39,895 km in 2022, which is lower than the 40,322 km in 2018, while Malaysia’s total pipe length had grown at a compounded annual growth rate of 1.9% to 135,975 km in 2022, from 126,327km in 2018.

Furthermore, it pointed out: “Higher water tariffs will provide improved return on investments (ROI) to the water supply operators which can be ploughed back into investments, including pipe replacements.

“Non-revenue water (NRW), due to pipe leakages, faulty meters and pilferages, was 34.4% in Peninsular in 2022, a slight uptick from 2018’s 33.9%.”

Tradeview Capital’s chief investment officer Nixon Wong concurred with the possibility that better ROIs could be useful, telling StarBiz that the tariff hike provides water supply players with additional funds earmarked for infrastructure replacements and upgrades.

He opined that improved revenue serves a dual purpose of, firstly, lowering leakage and the unwanted production of NRW, thereby directly improving production efficiency and reducing the occurrence of water cuts as a result of pipe replacement or upgrades.

“Secondly, it ensures the quality of water supply by improving pipe infrastructure, such as the phase-out of asbestos cement pipes.

“With an improved funding capacity, companies can bolster their service capabilities, enabling exploration and connection to new and previously unexplored areas,” he highlighted.

Maybank IB Research added that should the tariff re-rating come through, water supply operators and pipe producers would benefit; the latter from pipe replacements which could be stepped up.

Not surprisingly, the securities firm as well as experienced market analysts such as Tradeview’s Wong and Rakuten Trade head of equity sales Vincent Lau picked similar stocks that they think stand to gain such as Ranhill Utilities Bhd and PBA Holdings Bhd, with Lau also expecting Kumpulan Perangsang Selangor Bhd (KPS) and Puncak Niaga Holdings to do likewise.

Pipe producing companies that would benefit include Engtex Group Bhd, YLI Holdings Bhd, Hiap Teck Venture Bhd and Resintech Bhd.

Of particular interest however, is the fact that the share prices of a number of the aforementioned companies had actually appreciated markedly over the past month even before the SPAN announcement yesterday, such as Ranhill, PBA, KPS and Engtex.

Wong believes the current share prices of certain counters are mirroring uncertainties regarding the actual magnitude of the tariff hike, which suggests potential upside once these details are clarified.

Nevertheless, he added: “The sector might experience a re-rating with more information on the implementation of regular tariff revision and Imbalance Cost Pass Through mechanism.

“This is crucial for sustaining ongoing efforts to ensure regular improvements in piping and related infrastructure.”

His projection that there could be further upside in water-related and piping counters were echoed by Lau, who said potential earnings growth should lend further support to share prices of such stocks despite the early preemptive appreciation seen in some of them.

Moreover, Maybank IB Research commented that other players in the portable water supply chain, including meter suppliers and contractors, will also profit when new upstream infrastructure such as dams, treatment plants, pump houses are built, identifying George Kent (M) Bhd, Salcon Engineering Bhd and Taliworks Corp Bhd as potential beneficiaries.

Separately, another analyst from a local research firm has expressed his concern over the increase in NRW in 2022 from 2018, saying that the wastage is a common factor that affects the financial performance of water companies significantly, especially contributing to operating expenses.

She mentioned that Malaysia could do better in this regard, particularly in view of the World Bank’s suggestion that NRW should be below 25% of the total water a country produces.

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