Sabah’s 10-Year Generation Plan Presents Opportunity For Ranhill And Sabah Energy Consortium: RHB

The 60:40 consortium comprising Ranhill Utilities and Sabah Energy Corp has won a bid for a 100 megawatt combined cycle gas turbine power plant on Sabah’s west coast. The job entails a 21-year power purchase agreement with Sabah Electricity with an expected commercial operation date by 1 Mar 2026.

“As we see further opportunities in the state, Ranhill Utilities’ valuation appears undemanding – it is trading at -0.5 standard deviation below its 5-year mean price-to-earnings ratio,” said RHB Research (RHB) in the recent Small Cap ASEAN Research Report.

Ranhill Utilities has two existing combined cycle gas turbine plants with capacities of 190 megawatt each via Ranhill Powertron 1 and Ranhill Powertron 2 that have been operating since 1998 and 2010. Therefore, RHB believes execution risks for the new power plant are manageable. Under Sabah’s 10-year generation plan, a total of 200 megawatt in generating capacity is expected to come on-stream in 2024 and 2025 – RHB thinks this presents opportunities for Ranhill Utilities.

“We make no changes to our financial year 2023 future-2025 future earnings, as the combined cycle gas turbine power plant’s expected commercial operation date is by 1 Mar 2026, for example, beyond our forecast horizon. Valuation-wise, the new combined cycle gas turbine power plant results in a net additional value of RM0.07/share to our SOP-derived trading price, which brings it to RM0.75 after imputing an environmental, social and governance premium of 2% based on our in-house proprietary methodology,” said RHB.

Key assumptions for the combined cycle gas turbine power plant estimates include: i) RM500 million capital expenditure, ii) 70:30 debt-to-equity financing, iii) average capacity factor of 85%, iv) capacity rate financial of 34 sen/kilowatt-hour, v) gas costs of RM15/one million British thermal units, and vi) a project internal rate of return of 6%. 

Ranhill Utilities is proposing to extend the power purchase agreement of its existing Ranhill Powertron 1 power plant by another eight years to 2037 from 2029 previously. Based on the Sabah Electricity Supply Industry Outlook 2019 report, peak energy demand is expected to grow by c.14% to around 1,080 megawatt in 2029 from c.950 megawatt in 2018 – under which the reserve margin may drop to 3% from 2027’s 33% peak. 

“Therefore, we believe the chances for a power purchase agreement extension are high so as to meet the state’s growing energy demands,” said RHB.

Overall, RHB believes the expected completion of the Southern Link project (an alternative main grid that will connect Sabah’s east and west coasts) this year will enable Ranhill Utilities to dispatch more electricity to the east coast, which is highly dependent on diesel generators.

Prospects for Ranhill Utilities include Indonesia’s Djuanda source-to-tap water project (estimated treatment capacity of 605 million litres/day and USD700-800 million capital expenditure) – it is leading a consortium that may participate in a public tender via an initiator status once feasibility studies are approved. 

Re-rating catalysts for Ranhill Utilities would be a potential boost in dividend payouts in financial year 2023 should it partly utilise cash proceeds from its non-revenue water reduction incentive, coupled with larger-than expected engineering job wins. 

“Risks to our call are lower-than-expected water consumption and developer contributions, and a failure to secure new contracts under the services arm,” said RHB.

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