What’s the News

YTL Power International Bhd (YTLPOWR), via its 70%-owned unit SIPP Power Sdn Bhd, is acquiring 31.4% equity interest in Ranhill Utilities Bhd (RANHILL) from Tan Sri Hamdan for RM0.995/share or RM405.2mn cash through direct business transactions (DBT). The acquisition triggers the threshold for mandatory take-over offer (MTO) and SIPP Power will extend the MTO to acquire the remaining RANHILL shares not already owned.

More Details

The transaction entails the acquisition of 405.2mn shares together with 2.0mn new shares to be issued via share dividend (0.5 shares for each 100 RANHILL shares). The DBT will be completed in 2 tranches. Prior to the transaction, YTLPOWR directly owns 18.9% stake and indirectly owns 2.9% stake via 70%-owned SIPP Power. The remaining 30% of SIPP Power is owned by SIPP Energy Sdn Bhd, which is controlled by former UMNO Kota Tinggi division chief, Datuk Daing A Malek Daing A Rahman. Following the DBT, YTLPOWR's total direct and indirect stake in RANHILL will increase from 21.8% to 53.2%, making RANHILL its subsidiary. YTLPOWR's effective stake (excluding minority interest) in RANHILL will also increase to 42.9%. The acquisition will be funded with internally generated funds and is expected to be completed in June 2024. Meanwhile, the MTO is slated for completion by 3Q2024. YTLPOWR intends to maintain RANHILL's listing status.

Our View

RANHILL’s Perspective

We believe that the MTO price is unfair for RANHILL's investors as the price is lower than our target price of RM1.06/share. Considering that RANHILL closed at RM1.35/share (35.7% upside from MTO price) on Tuesday (28 May) and YTLPOWR intends to maintain RANHILL’s listing status, investors are better off selling the shares in the open market. Nonetheless, we are positive on the acquisition in the long-term as YTLPOWR could improve RANHILL’s profitability by leveraging on its vast experience in the utilities sector.

YTLPOWR’s Perspective

We opine that RANHILL’s acquisition at RM0.995/share is fair since the price is lower than our target price for RANHILL. The acquisition is earnings accretive but is not expected to immediately move the needle for YTLPOWR, contributing merely 0.4% additional earnings for FY25-FY26. However, by having a controlling stake in RANHILL, YTLPOWR can further improve RANHILL’s bottom-line by leveraging on the group's experience in managing Wessex water in the UK and Power Seraya in Singapore. YTLPOWR can also gain exposure in large scale solar (LSS) farm and utilise RANHILL’s experience in LSS to build the solar farm for its 500MW green data centre. The potential synergy from the acquisition is immense.

Looking at YTLPOWR's balance sheet, the group’s cash pile is at RM8.8bn at the end of March 2024. Assuming that only the DBT was completed and the MTO is not taken up at all, based on the latest quarterly financial statements, the acquisition is expected to slightly increase the group's pro forma net gearing ratio from 1.16x to 1.20x.

Impact

No Change to Earnings Forecasts.

Recommendation

We advise RANHILL’s investors to not accept the MTO due to the alternative of selling the shares at open market at higher price. Maintain Sell with unchanged TP of RM1.06/share on RANHILL as we believe RANHILL’s share price has moved ahead of its fundamentals. Meanwhile, we reiterate our Buy recommendation on YTLPOWR with unchanged TP of RM6.35/share. YTLPOWR is set to benefit from high demand for AI data centre.

Source: TA Research - 29 May 2024