| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
The latest quarterly results for the utility conglomerate came in weaker than market expectations, primarily due to underperformance in its Singapore-based power generation segment and significant losses within the telecommunications division. Core net profit for the quarter stood at RM551 million, marking a 27% year-on-year decline and falling short of both analyst and consensus estimates.
Performance Review
Group revenue experienced a 6% year-on-year contraction, largely influenced by the power generation division’s lower retail and pool prices, coupled with a stronger Ringgit. The telecommunications segment also faced a substantial 39% year-on-year revenue decrease owing to reduced project revenue and increased losses. Margin compression in the power generation segment, a result of lower selling prices and normalised gas costs, further impacted overall earnings.
In contrast to these challenges, the water and sewerage division emerged as a significant bright spot. It recorded a quadrupling in pre-tax profit to RM225 million, buoyed by tariff revisions for Wessex Water effective April 2025 and an improved contribution from Ranhill Utilities. This segment’s robust performance partially offset the headwinds faced by other divisions.
Challenges and Outlook
The power generation market is increasingly competitive, with retailers transitioning towards renewable energy and natural gas hedges gradually expiring. Furthermore, substantial new capacity (estimated to add over 10% to supply capacity) is expected to enter the market between CY26 and CY29 from various players, including the company’s own 600MW hydrogen-ready CCGT by end-CY27. This influx of capacity signals a more challenging operating environment.
Despite current challenges, the company is actively pursuing growth opportunities. On the domestic front, a bid has been submitted for up to 1.4GW new Combined Cycle Gas Turbine (CCGT) capacity under the Energy Commission’s latest tender.
Strategic Growth Drivers
The water and sewerage division is anticipated to see continued earnings improvement in FY26F-27F, driven by Wessex Water entering a new regulatory period from April 2025, which includes a 21% tariff increase. The division is also appealing for higher total expenditure for the 2025-2030 regulatory period, with a decision expected within IQYC26 that could lead to further tariff increases.
The data centre segment represents a key growth pillar. The company has successfully secured offtakers for a total of 168MW colocation data centre (DC) capacity and an additional 10MW of 20MW AI DC capacity. Commissioning of these projects is phased, with portions of JDCI, JDC2, JDC3, and JDC4 already handed over to clients or scheduled for completion through 2029. These projects include capacity for a Singapore-based e-commerce company and a US hyperscaler, underscoring strong demand in this high-growth area.
Investment Recommendation
While the conglomerate faced a weaker quarter, the investment bank highlights the promising trajectory of its water and sewerage business and the significant expansion in its data centre ventures as key long-term growth drivers. These strategic initiatives are expected to underpin future earnings. As a result, TA SECURITIES maintains a BUY recommendation on the stock with a target price of RM0.25, representing an upside of 25.0% from its last traded price of RM0.20.
