KUALA LUMPUR (Nov 2): YTL Power International Bhd's share price hit a new high on Thursday trade to RM2.33 per share, after it emerged as a substantial shareholder in Ranhill Utilities Bhd with the acquisition of a 18.87% stake.

At the market close, the stock had pared some gains to settle at RM2.29, still up by 11 sen or 5.05%. This gave YTL Power a market capitalisation of RM18.68 billion. Year to date (YTD), the stock has trebled in value from 70.6 sen on Jan 3.

The independent power producer (IPP) bought 243.33 million shares in its smaller rival on Wednesday at an undisclosed sum.

Rough calculations based on Ranhill Utilities' share price trading range on Wednesday morning indicate that YTL Power could have paid between RM141.13 million and RM144.78 million for the bloc of shares.

Ranhill Utilities' share price also rallied after the news broke, hitting a seven-year high of 82 sen apiece, amid heavy trading.

At the market close, the stock pared some of its gains to settle at 78.5 sen, which is still five sen or 6.8% higher than its last closing price of 73.5 sen. It has a market capitalisation of RM1.04 billion.

YTD, shares in Ranhill Utilities have almost doubled from its Jan 3 closing price of 42.3 sen.

Meanwhile, 75.27 million shares changed hands, making it the third-most active stock on the local bourse. This is about 27 times its 200-day average trading volume of 2.84 million shares.

According to a research note by CGS-CIMB, Ranhill Utilities is the only water supplier in Johor. Its 46 water treatment plants across the state have a treatment capacity of 2.13 billion litres per day.

The company also owns nine water treatment plants in Thailand with a capacity of 1.17 billion litres per day, while it owns a 40% stake in 12 plants in China with a capacity of 227 million litres per day.

Ranhill Utilities also operates two gas-fired power plants in Sabah with a combined capacity of 380MW, supported by 21-year power purchase agreements that will expire in 2029 and 2032. It has a 60% stake in the first plant and an 80% stake in the other plant.

Meanwhile, it also offers engineering, procurement, construction and commissioning (EPCC) services, as well as project management services for infrastructure assets across multiple industries.

"Recent notable contracts include the detailed engineering design services for the Kasawari carbon capture and storage (CCS) in Malaysia," the research house said.

A surprising yet strategic acquisition by YTL Power

RHB Research said while the acquisition was a surprising move, the firm believes that it is a strategic fit for YTL Power due to its experience in both water treatment and power generation — the company's subsidiary Wessex Water Services Ltd is a water and wastewater services provider that operates in the southwest of England, while its other subsidiary YTL PowerSeraya Pte Ltd's power generation business in Jurong island, Singapore, has a licensed generating capacity of 3,100MW, and acquired Tuaspring Pte Ltd, which owns a 396MW combined cycle gas turbine power station, for S$270 million (RM940.3 million) in June 2022.

"This will also further strengthen [YTL Power's] footprint in Johor, where the company is also developing data centres and solar parks. There should not be an impact on earnings for now, since YTL Power’s stake is still below the 20% threshold. As such we maintain our earnings estimates for the company.

"YTL Power’s net gearing is at 1.37 times as of FY2023, but this acquisition should not strain its balance sheet significantly, given its healthy operating cash flow and solid cash balance of RM9 billion.

RHB Research kept its "buy" rating on the stock and target price at RM2.43, based on an ESG score of 2.9 out of 4.

Meanwhile, CGS-CIMB said the acquisition works out to around three times enterprise value/earnings before interest, tax, depreciation and amortisation (EV/Ebitda) and a free cash flow yield of 12%, based on Bloomberg's consensus 2024F estimates.

"... in our view, appears attractive [because of] growth outlook for Ranhill [which] seems encouraging, driven by: 1) the potential increase in demand for water supply in Johor, on the back of the planned economic zones in Johor; 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; [and] contributions from its maiden 50MW LSS4 solar farm in Bidor, Perak from Dec 2023F."

CGS-CIMB noted, however, that the key challenge would be for YTL Power to increase its stake meaningfully to equity account Ranhill's earnings.

The research house also maintained its "add" rating and sum-of-parts-based target price of RM2.40.

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YTL Power emerges as substantial shareholder of Ranhill Utilities