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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