Water stocks to make a splash on tariff hike

PETALING JAYA: Water infrastructure-related stocks stand to gain from the government’s revision of water tariff rates for nearly all of Peninsular Malaysia and Labuan, as higher revenue enables upgrades to ageing infrastructure.

BIMB Securities said the long-overdue reform, which came into effect on Aug 1, may only be the first step.

The national average domestic tariff of RM1.54 per cubic m across all bands still falls short of the average water treatment cost of RM1.89 per cubic m, based on the 2023 data from the Water Services Commission.

“While the latest revision helps narrow the deficit, full cost recovery is still elusive, suggesting room for further rationalisation ahead,” BIMB Securities said, noting that the change narrows the cost-recovery gap and re-establishes commercial viability for long-term infrastructure investments.

It pointed out that Johor alone requires an estimated RM6.8bil in capital investment by 2030 to reduce non-revenue water (NRW), meet rising demand and ensure long-term supply resilience, according to the roadmap outlined by Ranhill SAJ Sdn Bhd, an 80%-owned subsidiary of Ranhill Utilities Bhd.

The research house added that the upward revision reinforces the financial sustainability of the water sector by enhancing returns on regulated assets and improving cash-flow visibility for concessionaires such as Ranhill SAJ, Pengurusan Air Selangor Sdn Bhd and Perbadanan Bekalan Air Pulau Pinang Sdn Bhd.

BIMB Securities has a “buy” call on Gamuda Bhd, with a target price (TP) of RM6.05.

Other stocks that stand to gain from the tariff revision include Engtex Group Bhd, Taliworks Corp Bhd and Hiap Teck Venture Bhd, given their involvement in treatment plant construction, NRW-reduction projects and pipeline upgrades.

However, BIMB Securities does not cover the latter three companies.

Meanwhile, RHB Research has maintained a “buy” call on Ranhill, raising its TP to RM1.70 from RM1.37.

Ranhill SAJ has also announced a new set of water tariffs effective Aug 1 for all types of users, including a new tariff category for data centres (DCs).

The research house estimated that an additional 300MW in DC capacity will come online annually over the next six years.

“Our estimates indicate that DC water consumption is roughly 8% to 15% of the non-domestic water usage in the next three years,” it said.

As a result, RHB Research has revised its earnings estimates upward for the financial years ending June 30, 2026 (FY26), and FY27 by 15.3% and 23.4%, respectively,.

It also raised its water consumption growth assumption for Ranhill SAJ to 4% (from 3.5%) from FY30 onwards, citing strong demand from completed DCs and the Johor-Singapore Special Economic Zone.