the WSIA and RUBHD

Water Service Industry Act 2006

The Act was enforced on 1 January 2008. The enforcement of this Act is a step taken by the Federal Government to reform the water service industry in our country. (However, water service industry of Sabah & Sarawak are not included in the plan).

Two new bodies have been formed in this restructuring program, namely SPAN (Suruhanjaya Perkhidmatan Air Negara) and PAAB (Pengurusan Aset Air Bhd).

This program has very important effect on the industry. Some of them are:

• The Federal Government takes over control and regulation of water supply and sewerage services from States.
• All existing water supply services run by State Governments will be corporatised.
• A national Water Services Commission, SPAN was be set up to regulate the water services industry.
• a Water Assets Management Company (the PAAB) was formed to:
• Take over State Water existing assets and Federal loan liabilities
• Fund and develop water supply infrastructure
• Leased back to water service providers existing & new assets.

There will be no more new privatised concessions after WSIA. New operators will be granted licenses by SPAN. Unlike the long-term concession agreements, the licenses are renewable upon application and approval of SPAN.

(for more information, please visit http://www.span.gov.my/)

For those existing concessionaires, they may have an option to retain their existing concessions or to migrate to the new license.

(According to the announcement by RUBHD on November 2007, its subsidiary SAJH is actively assesing the migration option.)

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The possible impact on RUBHD, should it chooses to migrate into the new liscense.

After the migration, SAJH may loss the advantages of being a concessionaire. Under the new scheme, the license is renewable subjected to the approval of SPAN. While the possibility is small, the water supply business of SAJH in Johor may be taken over by some other parties. Thus, RUBHD may face some competitions from the other companies, e.g. Syabas and Puncak Niaga.

On the other hand, the operational cost may increase due to the leasing fees of the water assets from PAAB. And, unlike the privatization cocession, tariff reviews from the new liscensees will be based on applications which need to be substantiated by each licensee. (It means there will be no more "automatic tariff increase"). These may affect the profitability and future growth of RUBHD.

These are the uncertainties that worried me last year, and stopped me from accumulating RUBHD shares. Because, the monopoly nature of its business and the scheduled tariff hike were the main reasons that made me investing in RUBHD.

However, recently I had found that there’s also some positive impacts on RUBHD if SAJH chooses to migrate into the new licensing regime.

After transferring all its assets (with the associate debts) to PAAB, SAJH will become an asset-light company, and become more concentrate on its operations. At the same time, SAJH will free itself from the commitment of huge CAPEX in the future. Thus it will not need to keep a big amount of cash in the company.

This will unlock the equity value of RUBHD and allow the company to distribute its earnings to the share holders through dividend payments. I’m confident that the future dividend yield of RUBHD will be a quite satisfactory one.

And, according to its current financial condition (cash-per-share > RM2.00), there’s a high possibility that RUBHD will declare a special dividend or capital distribution, soon after the migration.

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Reasons investing in RUBHD

I discovered Ranhill Utilities Berhad few months ago.

It was an incident. A friend gave me a “tips” that a stock named Ranhill would go up very soon, and ask me to buy the stock. So, I went through its annual reports, then found that it was a conglomerate involves in various sectors ranger from construction to power generation plant. But after a short analysis, I immediately found that majority of its income is actually generated from one subsidiary—Ranhill Utilities Bhd, a company which is also listed on KLSE.

Then, my interest was switched to this RUBHD. After some research on the nature of its business, I then found that it is a good candidate for value investing, and also for long term investment.

My conclusion is just based on the reasons stated below:

1. Monopoly Business

RUBHD main income is from its subsidiary named SAJH, which hold a Concession Agreement with Johor’s State Government to supply water to the consumers in the state. The concession period is 30 years (from 2001 to 2029). Obviously, this is a stable, monopoly business. Thus, RUBHD doesn’t have any risk from competition or lost of market share.

2. Guaranteed Return

The following passage is taken out from RUBHD’s Financial Report FY-2007, page 97.

"According to the CA, the supply of treated water is charged in accordance to the Scheduled Tariff (water supply tariff to be charged by SAJH for a particular purpose or class of consumers), provided that the SAJH’s Internal Rate of Return (“IRR”) is within the Agreed IRR Band of 14% to 18% over the Concession Period. The Scheduled Tariff is to be submitted to the State Government for approval. The Agreed Tariff (approved Scheduled Tariff) will be gazetted and shall take effect for the applicable operating period on the relevant Tariff Adjustment Dates. The Tariff Adjustment Dates agreed with the State Government are as follow:

(i) First Tariff Adjustment Date – effected on 1 January 2001;

(ii) Second Tariff Adjustment Date – effected on 1 July 2003;

(iii) Third Tariff Adjustment Date – effected on 1 January 2007; and

(iv) Subsequent Tariff Adjustment Dates – scheduled on 1 January 2009 and thereafter at 36 monthly intervals till 2029.

In the event the gazetted tariff is lower than that of the Agreed Tariff, or in any other event the Agreed Tariff was not adopted, the State Government shall compensate SAJH in accordance with a formula as specifi ed in the CA. "

Isn’t this show that the RUBHD has a stream of income which is guaranteed by the State Government?

3. Attractive share price.

RUBHD’s earning per share for FY-2007 is about 70sen. This means that its share is currently trading at a PE value of 4, which is quite attractive.

Besides that, RUBHD’s current share price (RM2.80) is lower than its equity per share. According to its latest report, RUBHD equity per share is about RM3.50, and there is a large amount of cash in the company—its cash per share is about RM2.10. So, I think buying RUBHD at its current share price has a very low risk.

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Based on the stated reasons, I’d decided to invested some money in RUBHD. At the same time I continued my research on its industry. Then I found that there’s a restructuring scheme coming up soon, which will change the business environment of the water service industry in our country. It is the new Water Service Industry Act (WSIA), which would be in forced at the last quarter of 2007.

This has added some uncertainty to the prospect of SAJH. So, I decided to stop buying RUBHD until I can figure out the effect of this Act on the company. After some studies in these few months, now I’ve gain some understanding about WSIA. I’ll discuss it in my next post.

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My Portfolio at 31-Dec-2007

Here's the combination of my investment at the end of 2007.

(click the photo for full size view)

* the buying cost is adjusted for dividend received, and trading fee (brokerage fee) is included in the cost.

Comment:

AKN is my short-term holding. The main reason I bought it is because its price is below its value. I'll sell it anytime when the price is going back to a normal level (e.g. when PE = 10.)

Titan is a medium-term investment, my aim is waiting for its price to shoot up to RM2.50 while enjoying its tax-free dividend. I'm in the opinion that the upward cycle of petrochemical industry will continue until 2010 or 2011. I never worried about the short-term volatility of its share price. However, I think maybe I shouldn't put too much money on this stock at the begining. (about 33% of my total cost is invested in Titan, this is quite a high portion.)

RUBHD is a good stock I discovered half-year ago. But later I found that it will undergo a restructuring process under the Water Service Industry Act 2006 which will take effect on the end of 2007. The uncertainties of this restructuring make me stop accumulating RUBHD. I'll discuss this in the future post.

My initial expectation when investing in AirAsia, is to hold this stock for a very long-term. But now I realise that I've made a mistake in calculating its income. So, I need more time to observe it.

Supermax is another stock that I plan to hold it for long-term. I'll keep an eye on it and continue to observe the effect from its merger with Seal Polymer.

I still got a small amount of cash. Now I'm waiting for the some announcement from SC to clearify the brokerage fee of online-trading. If the minimum fee still remain the same (RM12), then I'll probablly invest this cash into 2 or 3 different stocks, to achieve a more diversified portfolio (the Graham's approach). Else, this money will go into a single stock, maybe RUBHD.