YTLPOWR which is in the midst of raising its stake in RANHILL (Not Rated) to 53.2%, is making a general offer (GO) for shares it has not already owned in the utilities company at RM0.995/share.  We see RANHILL’s water utility in Johor, IPP in Sabah, and large- scale solar project in Perak as good fits to YTLPOWR, although their impact to earnings is minimal. We maintain our forecasts, TP of RM5.22 and MARKET PERFORM rating.

YTLPOWR, through its 70%-owned SIPP Power Sdn Bhd is acquiring a 31.42% stake in RANHILL from the latter’s major shareholder Tan Sri Hamdan and his related parties for RM405.2m cash. Upon completion of the acquisition (targeted by June 2024), SIPP Power will own c.53.19% stake in RANHILL from 21.77% currently, which will trigger an unconditional mandatory take-over (MTO) offer to acquire all the remaining share in RANHILL not already owned by SIPP Power at RM0.995/share. YTLPOWR intends to maintain the listing status of RANHILL post the exercise.

The acquisition is valuing RANHILL at 22.1x FY23A PER, at a slight premium to 19.4x FY23A PER of PBA (Not Rated) based on its current share price. Assuming full acceptance by minority shareholders, at a total outlay of RM1.01b (including RM405.2m for a 31.42% from Tan Sri Hamdam and his related parties) will only reduce YTLP’s cash position of RM8.76b as at end-Mar 2024 to RM7.75b.

We expect minimal earnings impact on YTLPOWR given the relatively small earnings base of RANHILL. Based on consensus for FY24- FY25F net profit estimates of RM49.6m and RM55.2m, respectively, for RANHILL, earning impact to YTLPOWR is only 0.9% in FY24F. Nonetheless, strategically, RANHILL’s water utility in Johor, IPP in Sabah (100MW) and large-scale solar project in Bidor, Perak (50MW) are good fits to YTLPOWR.

Forecasts. Maintained.

Valuations. We maintain our SoP-derived TP of RM5.22 (see Page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We continue to like YTLPOWR for: (i) its earnings stability backed by various regulated assets globally, (ii) the strong near-term earnings prospects of PowerSeraya backed by gas inventory locked in at low prices, and (iii) its longer-term growth potential driven by its data centre and digital banking ventures. Maintain our MARKET PERFORM rating.

Risks to our recommendation include: (i) stringent ESG standards in developed markets, (ii) regulatory risk in the power sector in Singapore, (iii) the new data centre business fails to take off, and (iv) sustained losses at YES.

Source: Kenanga Research - 29 May 2024