PETALING JAYA: Water services operator Ranhill Utilities Bhd
is likely to take an earnings hit from rising electricity costs, which a tariff adjustment may not be able to cushion in the near term due to a timing mismatch.
BIMB Securities Research has downgraded the stock to a “hold” call from “buy”, while also revising the target price to RM1.92 from RM2.07, as it believes the market may be underestimating the impact of higher electricity prices on the company’s operations.
“Ranhill’s cost base is highly concentrated in electricity (65%), with chemicals accounting for a further 14%. With fuel prices trending higher and electricity tariffs becoming more dynamic, we expect continued upward pressure on operating costs.”
It added that a 5% increase in electricity costs could raise total operating costs by 3.25% and reduce net profit by 30%, reflecting the company’s high operating leverage.
“Under this scenario, the profit-after-tax margin would contract by approximately 1.7 percentage points, underscoring the asymmetric downside risk to earnings.”
BIMB Research added that there would be a lagging effect in the eventual cost pass-through from a water tariff revision as margins compress in the near term due to rising costs before recovering through a tariff adjustment over the medium term.
To account for rising costs, it has revised its financial year ending June 30, 2026 (FY26), earnings forecast downward by 11.8%, with FY27 earnings projected to be 23.1% lower and FY28’s earnings to see a 1.7% drop.
“For FY26, the impact of higher electricity costs is expected to materialise from the fourth quarter of FY26 onwards.
“The relatively smaller revision in FY28 reflects our assumption of a tariff adjustment within the financial year, based on an estimated 27% blended tariff increase, broadly in line with the magnitude of the previous revision,” it said.
While the stock has recently outperformed and remains positioned as a defensive, regulated earnings proxy, it sees limited near-term catalysts to offset these headwinds, with the timing mismatch between cost escalation and tariff pass-through likely to result in a period of earnings compression over the next 12 to 18 months.
