YTL Power International Bhd (YTL Power) acquisition of 18.87% stake in Rainhill Utilities Bhd (Rainhill) could be strategic for the former and could strengthened its position in Johor, according to research houses.
RHB Investment Bank Berhad (RHB IB) was surprised by the acquisition, but believes the move could be strategic due to its experience
in water treatment and power generation, even as it continues to solidify its footprint in Johor, where it is also developing data centres and solar parks.
YTL Power had announced yesterday (Nov 1) that it has become a substantial shareholder of Rainhill after acquiring 243.3 million shares or a 18.87% stake in the latter.
“We believe the block of shares was acquired from Cheval Infrastructure Fund LP, which was also holding 18.8% stake prior to that. We estimate the total investment at MYR141m, assuming the block of shares was purchased at MYR0.58 per unit – which implies valuations
of 15.9 times FY24F P/E and 0.9 times FY24F P/BV,” it said in its Company Update note today.
RHB IB keeps it BUY call and RM2.43 TP, 12% upside with c.3% FY24F (June) yield. This includes a 2% ESG discount, based on YTLP’s
RHB highlighted that Ranhill has three segments – environment, engineering services and energy, with environment segment as the largest revenue contributor, accounting for 68% of its total MYR1.7bn revenue in FY22, followed by engineering services (16.7%) and energy (15.3%).
“The bulk of the environment segmental revenue comes from being Johor’s sole water operator – where it manages 46 water treatment plants with a total daily capacity of 2.13bn litres.
“Meanwhile, the energy division entails two combined cycle gas turbine or CCGT power plants with a capacity of 190MW each in Sabah. It also owns a 50MW large-scale solar or LSS 4 solar farm with a commercial operation date scheduled for end-2023,” it said.
RHB said there should not be an impact on earnings for now, since YTLP’s stake is still below the 20% threshold.
“As such we maintain our earnings estimates for the company. YTLP’s net gearing is at 1.37 times as of FY23, but this acquisition should not strain its balance sheet significantly, given its healthy operating cash flow and solid cash balance of RM9 billion,” the research house said.
Its risks to call include weaker-than-expected plant performance, and higher-than-expected operating costs.
Meanwhile, CGS-CIMB, has similarly view the acquisition positively, saying it will give YTL Power a footing into the Malaysian utilities space again.
“Ranhill offers exposure to Johor’s water demand, renewable energy opportunities and Sabah’s electricity market tightness,” it said in its Company’s Flash Note today.
Therefore, CGS-CIMB reiterate its ADD rating, with an unchanged SOP-based target price of RM2.40.
The research house said it appears that the transaction was carried out at RM0.58 per share, translating into a purchase price of around RM140 million. It views the acquisition as attractive, as the price works out to around 3 times EV/EBITDA and an FCF yield of 12%, based on Bloomberg consensus’ 2024F estimates.
“Growth outlook for Ranhill seems encouraging driven by he potential increase in demand for water supply in Johor.
“(Besides that), its incremental earnings from the recently secured contract in March 2023 for a 100MW gas fired power plant in Sabah, with planned commercial operations in 2026F as well as contributions from its first 50MW LSS4 solar farm in Bidor, Perak from Dec 2023F,” the research house said.
CGS-CIMB also noted recent notable contracts include Rainhill’s detailed engineering design services for the Kasawari carbon capture and storage (CCS) in Malaysia.
“However, we feel the key challenge would be for YTLP to increase its stake meaningfully to equity account Ranhill’s earnings,” it added.
Among the key downside risks for its call include harper-than-expected normalisation in electricity sales margins, and earnings drag from non-core operations.
