RUB Me Up The Right Way

Been a long time since I have highlighted a single stock worth considering to go long. To the many who have queried, I think RUB looks interesting.

The Edge: The consolidation of water players in both Johor and Selangor will probably be concluded by year-end, the National Water Services Commission or Suruhanjaya Perkhidmatan Air Negara (SPAN), chief executive officer Datuk Teo Yen Hua told The Edge during an exclusive interview late last week. “(It will happen) soon, probably by the end of the year, barring any unforeseen circumstances, as tariff reviews are due in both states in 2009 as per concession agreements,” Teo had said.

These would indicate that the takeover of Puncak Niaga Holdings Bhd by Kumpulan Darul Ehsan Bhd (KDEB), and the merging of two water players in Johor — Ranhill Utilities (RUB) and Aliran Ihsan Resources Bhd — should commence soon. Towards this end, Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), a 70% unit of Puncak is understood to be meeting with the relevant authorities today, to discuss details of a possible revision in water tariffs by some 37%. This water tariff hike is slated for early 2009.

According to CIMB Investment Bank, the 37% water tariff hike is important for Syabas as without the increase, operational cash flow will remain negative. “Our sensitivity analysis indicates that for every 5% point shortfall in the tariff hike, Puncak’s sum of parts, discounted cash flow (SoP DCF) value would be shaved by RM1.30,” CIMB had stated in a report released recently. Syabas, which has a 30-year concession to provide treated water to Selangor, Kuala Lumpur and the federal capital of Putrajaya, also has KDEB as a 30% equity holder.

Talk of a merger between Puncak and KDEB has been ongoing for about a year, but no details have been divulged, possibly because nothing concrete has been formed as yet. According to industry players, KDEB, which is the investment arm of the Selangor state government, is mulling various methods in which to take over Puncak, but have yet to come to a concrete decision. As for the merger in Johor, there have been news reports previously published, stating that Aliran Ihsan, a company controlled by tycoon Tan Sri Syed Mokhtar Albukhary may exit, selling the company to RUB. RUB is a publicly traded company controlled by Tan Sri Hamdan Mohamad. When met last week at a water conference, Asia Water 2008, RUB’s chief executive officer Ahmad Zahdi Jamil had declined to comment on the specifics but merely stated that it was a federal government issue.

There has also been a lingering rumour in the market place of RUB being privatised, with Arab Malaysian Merchant Bank Bhd advising on the deal. Ahmad Zahdi had declined to comment on this issue as well. Ranhill officials have previously stated that they were looking at the possibility of privatising RUB but were sourcing funds, and were still exploring opportunities. This privatisation could be a precursor to the merger of both players in Johor. RUB’s main asset is SAJ Holdings Sdn Bhd, which has a 30-year concession to provide treated water in Johor till 2029.

Comments: Ranhill Utilities' 1HFY08 net profit of RM120.7m was 19.2%. The stronger performance was mainly attributed to a deferred tax revision that translates to a positive tax charges of RM1.2m in 2Q. Revenue remained flattish from limited growth in customer base as well as water usage in Johor state. The Water Services Industry Act came into force w.e.f. 1 Jan 2008 but most of the implementation is still under initial implementation stage. The government has established SPAN (Suruhanjaya Perkhidmatan Air Negara) and PAAB (Syarikat Pengurusan Aset Air Berhad) as the backbone for the new national water body and existing concession holders have the option to choose whether to retain or migrate to the new frameworks. RUB already has had few round of discussions with the government on its plan for migration but details remain sketchy at this juncture . Following the recent elections, things could be even more fluid.

The reformation of water industry may see RUB via its subsidiaries Ranhill Water Technologies SB and Ranhill Water Services SB repositioning for the upsurge in demand for water solution services locally. Apart from that, RUB's overseas venture into a few small waste water treatment plants (WWTP) in China and consultation works done for the Saudi Arabia government have enabled the group to expand into these regions. The company was also awarded a non-revenue water (NRW) contract worth RM36m by Syarikat Air Melaka Bhd recently.

Profile: The principal activities of RUBHD are investment holding, provision of administrative and technical support services to the subsidiaries and consultancy services. The principal activities of the subsidiaries are provider of water supply and distribution business solutions, consultancy and water related services. SAJ Holdings Sdn Bhd, a 100% owned subsidiary of RUBHD, holds a 30-year privatization concession to process and treat raw water and supply treated water to consumers in Johor commencing from 1 March 2000. The company operates 43 treatment plants in Johor with a total capacity of 1,208 mn litres of treated water per day. Besides this, RUBHD maintains and operates more than 9,000 km of pipework systems and 429 water tanks that store treated water for distribution to customers. To note, the company also has twelve agency offices located throughout Johor to bill and collect water revenue from more than 740,000 customers. Meanwhile, RUBHD undertakes the Semangar Water Supply Scheme to design, construct, operate and maintain a new water treatment plant with a capacity of supplying 160 mn litres of water daily to the consumers in Johor. The company also operates a laboratory in Batu Pahat to monitor the quality of treated water by regular sampling at more than 900 sites statewide.

Paid Up: 294.5m shares
Book Value: RM3.51
Ranhill Bhd holds 70% of RUB

The current price of RUB is around RM2.70. Looking at the corporate developments, RUB is very likely to be privatised. It makes no sense for Ranhill Bhd to hold 70% and not to take the vehicle private. The changing political landscape will hasten the privatisation strategy. Its easier to navigate and negotiate as a private vehicle. A privatisation bid should be close to its book NTA of RM3.51, a slight discount would peg it at RM3.20-3.30.

p/s photo: Michelle Saram