KUALA LUMPUR (Sept 25): RHB Investment Bank Bhd (RHB IB) has initiated coverage on Ranhill Utilities Bhd shares with a “buy” call and target price of RM1.23 after taking into account the electricity producer and water supply services provider's defensive earnings from long-term regulated concessions.

RHB IB analysts Eddy Do Wey Qing and Muhammad Danial Abd Razak wrote in a note today it expects Ranhill Utilities to generate stable revenue in the coming years, sustained by scheduled water tariff hikes and population growth.

"Another all-weather stock pick," Do and Muhammad Danial said.

"We consider future earnings streams to be more predictable, with lower risk, given the somewhat guaranteed pricing, customers, and a product that people simply cannot live without," they said.

RHB IB has also taken note of Ranhill Utilities' attractive valuation and decent dividend yield.

"Compared to its peers in the KL Utilities Index, Ranhill (Utilities) currently trades at a circa 65% discount to average peer FY21F EV/EBITDA, which — in our view — is undemanding, given the decent pipeline of near-term catalysts.

"Dividend yield of 4% is attractive in the current interest rate environment, supported by robust cash flows from (Ranhill) SAJ’s water supply operations," the analysts said.

EV stands for enterprise value while EBITDA stands for earnings before interest, taxes, depreciation, and amortisation.

Bank Negara Malaysia said in a statement on Sept 10, 2020 that its Monetary Policy Committee had on that day decided to maintain the overnight policy rate at 1.75%.

Today, the RHB IB analysts said risks to its call for Ranhill Utilities include licensing risks, timeliness of tariff revisions, lower-than-expected water consumption, escalating cost for its water business, and failure to meet capacity and energy payment conditions for both its power plants.

At Bursa Malaysia's 12:30pm break today, Ranhill Utilities settled unchanged at 85 sen, which values the company at about RM902.55 million.

The stock saw 263,200 shares traded.