PETALING JAYA: Ranhill Utilities Bhd
’s water segment will continue to anchor the group’s earnings growth, although margin normalisation is expected over the medium term, says BIMB Research.
“We believe current margin levels are unlikely to be sustainable over the longer term, as progressively higher electricity costs are expected to weigh on operating margins, while the regulated full cost recovery framework effectively caps returns for water operators,” the research firm said in note to clients.
It explained that under the FCR mechanism, tariff structures are designed to allow operators to recover costs while earning a regulated return, typically targeting returns not materially above 10%.
On the group’s third quarter ended March 31, 2026 (3Q26) net profit, BIMB Research said Ranhill’s earnings rose sharply to RM59.9mil, bringing nine-month financial year 2026 (FY26) core earnings to RM130.2mil. Notably, this strong earnings growth was achieved despite group revenue declining 3.1% quarter-on-quarter (q-o-q) to RM612.5mil, reflecting the exceptionally strong operating leverage within the water segment.
“Overall, the results came in above our and consensus expectations, accounting for 106.7% and 100.5% of our and consensus FY26 forecasts, respectively.
“The earnings outperformance was primarily driven by the water segment’s profit-before-tax (PBT) margin expansion to 17% (2Q26: 13%), alongside a lower effective tax rate of 19.6% (2Q26: 25.5%),” the research house added.
However, contribution of Ranhill’s power segment softened in 3Q26, although concession visibility strengthened.
Power revenue declined 13.2% q-o-q to RM57.4mil, while PBT fell 36.7% to RM4.1mil. Margin for the segment softened to 7% from 10% previously, reflecting weaker contribution from energy payment revenue and potentially early signs of rising input cost pressure.
Nevertheless, BIMB Research remained positive on the segment’s longer-term positioning as management continues to progress its Sabah power strategy and broader energy transition initiatives.
More importantly, Ranhill has received a letter of intent for the extension of the Ranhill Sabah Energy I (RSEI) concession from 2029 to 2032, with a formal proposal targeted for submission to the Energy Commission of Sabah by July 31, 2026.
The research house said based on its preliminary assessment, a successful three-year extension for RSEI could potentially add around five sen to 12 sen to its sum-of-the-parts valuation, depending on the final concession structure and tariff terms.
Following this, BIMB Research revised its target price upward to RM1.94 from RM1.92. Despite the stronger near-term earnings outlook, it maintained its “hold” call, noting that current valuations already reflect the improved operational performance, while uncertainty surrounding medium-term electricity costs remains a key overhang.
Meanwhile, TA Research has raised its FY26 to FY28 net profit forecasts for Ranhill by 12%-19% to reflect higher margin assumptions for the water division and lower effective tax rate assumptions.
However, it believes earnings could moderate in the coming quarters on the back of potentially higher electricity tariffs, particularly for the water division, which is a major consumer of electricity.
The research house said every 1% change in the effective electricity tariff could impact group earnings by 0.6% annually.
Notwithstanding the temporary impact of higher electricity cost, it said Ranhill is well positioned to benefit from the data centre (DC) buildout in Johor. Geopolitical instability could also drive geographical diversification of the huge Middle Eastern DC investment pipeline, which could benefit South-East Asian DC hubs.
A dealer said he continues to favour Ranhill as a key beneficiary of Johor’s DC expansion and the Johor-Singapore Special Economic Zone, given its position as the state’s sole integrated water supply operator.
