PBA gets much needed boost, stronger earnings expected

PBA Holdings Bhd is likely to continue its upside movement having close above the RM1.73 resistance level. PBA’s share price movement has been impressive, surging 122.9% to close at RM1.85 on Aug 19. The counter touched a 52-week high of RM2.62 in January from a low of 78 sen last November.

PBA is a licensed water-supply operator that serves Penang and it manages the water resources very well. It is a dividend yielding stock with a consistent dividend yield of 3% to 4% per year.

PBA's earnings are expected to come in strong once the water tariffs are revised. This would translate into higher earnings and enable the company to pay out higher dividends. In addition, PBA is seen as an ESG stock, thus, will likely attract a lot more fund flows from investors who are interested in putting their money into ESG stocks.

Higher tariff rates for non-domestic users in Penang were implemented on 1 Jan 2023. This along with lower energy costs contributed to PBA achieving its best-ever quarterly pre-tax profit of RM29.1 million in 3Q23.

Given its monopoly status and its position in a non-cyclical sector with inelastic demand, a higher P/E ratio of 7-8x seems fair. If PBA is valued at 7-8x P/E, its potential worth could range from RM1.05 billion to RM1.2 billion, translating to a per-share value of RM3.17 to RM3.63.

New domestic water rates came into effect in Penang with effect from Feb 1 in compliance with the new Federal Government Regulations. PBA said the rise in water tariff rates will put it in a better position to finance urgently needed water projects to meet Penang’s increasing water demand.

Its group chief executive officer (CEO) K Pathmanathan said the new rate of 0.86 sen per cubic metre (m3) for up to 35 m3 of monthly usage is positive for the company’s revenue, and will help raise funding to implement major water supply engineering projects.

Meanwhile, group chief financial officer Dr Mary Ann Harris said while its business prospects are intact post new rates, revenue will likely moderate due to non-billing for the first 10,000 litres for domestic consumers.

A single-tier final dividend of 1.75 sen per share was declared. The entitlement date is July 15, with a projected total payout of RM5.79 million by July 26, 2024. Surely, higher payout and and stronger earnings are key to keep investors interested in this gem.