Tariff hike sees PBA shares hit 17-month high

Commercial water tariffs in Malaysia’s Penang province will go up by 27% in November – the first rise in 10 years. The incumbent supplier’s profits are set to soar.

A decision by the water authority on the Malaysian island of Penang to impose its first commercial tariff rise since 2001 has helped parent company PBA Holdings’ share price to rise by more than 20% over the past month.

News of the tariff rise by Penang Water Supply Corporation (PBAPP) – a wholly owned subsidiary of PBA Holdings – prompted analysts to raise their targets on the stock after it climbed by more than 9% to MYR0.93 on the day of the announcement.

As GWI went to press, PBA shares were still trading north of MYR1.00 – their highest level since April 2009.

“This will certainly bolster PBA’s financial performance for next year, and going forward,” Vincent Lim, an analyst at OSK Holdings in Kuala Lumpur, told GWI. “We have raised our earnings estimates and our target price for PBA from MYR1.23 to MYR1.48, and we maintain our ‘buy’ rating.”

Lim noted that the decision to raise the tariff had been “a long time coming”, and the fact that commercial users had been targeted for a price hike had been a purely political decision. “Tariff rises are political, especially if they are against domestic consumers. [PBA] has maintained its margins over the past nine years through cost control, so they are very tight. This tariff rise means their P/E going forward is very good. They are certainly the cheapest water stock in Asia, [and] the speculation is they could double their profits in the next year.”

PBAPP announced the new tariff system following a Cabinet decision to allow water rates to be raised in five states, including Penang. The tariff rise will see commercial users pay MYR0.66/m3 for the first 20m3 consumed in any given month (up from MYR0.52/m3) and MYR0.89/m3 for the next 20m3 (up from MYR0.70/m3). Between 40m3 and 200m3, tariffs will rise from MYR0.90/m3 to MYR1.15/m3, and to MYR1.27/m3 for consumption of more than 200m3 per month (up from MYR1.00/m3).

PBAPP CEO Ir. Jaseni Maidinsa said in a statement that while there had been no increase in tariffs since January 2001, the cost of water supply had increased by 64%. “Over the past decade, Penang’s water consumption has increased 30% and trade water consumption alone accounted for 39% of the total water consumption last year. We cannot continue subsidising water supply for businesses.”

However, Ir. Jaseni was keen to point out that Penang’s commercial water tariff is still among the lowest in Asia – even after the increase. Jakarta, for example, has an average commercial water tariff equivalent to MYR4.33/m3, while in Singapore it is MYR3.55/m3 and in Bangkok MYR1.24/m3. In Malaysia, Johor state has the highest, at MYR2.93/m3.

For Penang’s domestic users there will be no increase in rates, although a new water conservation surcharge of MYR0.24/ m3 will be imposed on consumers using volumes in excess of 35m3 of water per month.

PBAPP chairman Lim Guan Eng, who is also chief minister, said the move to impose the surcharge would only affect 30% of consumers and was necessary in order to curb an effective ‘domestic subsidy’ and cut wastage.