• YTLP announced that it has acquired an 18.87% stake Ranhill Utilities, effectively giving it exposure to the Malaysian utilities space again.

• We view the deal positively as it strengthens the company’s position in waste management services, in addition to being earnings accretive.

• Reiterate Add, with an unchanged SOP-based target price of RM2.40.

Building a Position in Ranhill Utilities

• In a Bursa filing on Wednesday, 1 Nov 2023, YTL Power International (YTLP) announced that it has acquired an 18.87% stake in Ranhill Utilities, effectively making it a substantial shareholder. No further details were provided on the transaction.

• Based on trading data on Bloomberg, it appears that the transaction was carried out at RM0.58 per share, translating into a purchase price of ~RM140m.

Background on Ranhill Utilities

• Ranhill owns water utility concessions and power assets. Its businesses are organised into three key segments: Environment, Energy and Engineering Services. In 1H23, these segments made up 65%, 15% and 20% of group revenue, respectively.

• Environment: It is the sole water supplier in Johor, owning 46 water treatment plants across the state with a treatment capacity of 2,133m litres per day (MLD). It also owns water treatment facilities in Thailand — 9 plants with a capacity of 117MLD — and China (40% stake) — 12 plants with a capacity of 227MLD.

• Energy: It owns and operates two gas-fired power plants in Sabah, with a combined capacity of 380MW (2 x 190MW), backed by 21-year power purchase agreements expiring in 2029 (60% stake) and 2032 (80% stake), respectively.

• Engineering services: It 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.

Initial Take: Building Exposure Into Malaysia’s Utilities Sector

• The acquisition price works out to ~3x EV/EBITDA and an FCF yield of 12%, based on Bloomberg consensus’ 2024F estimates, which, in our view, appears attractive.

• Growth outlook for Ranhill 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; 2) incremental earnings from the recently secured contract (in Mar 2023) for a 100MW gas fired power plant in Sabah, with planned commercial operations in 2026F; 3) contributions from its maiden 50MW LSS4 solar farm in Bidor, Perak from Dec 2023F.

• However, we feel the key challenge would be for YTLP to increase its stake meaningfully to equity account Ranhill’s earnings.

• We have an Add rating on YTLP, with an SOP-based TP of RM2.40. Key downside risks: sharper-than-expected normalisation in electricity sales margins, and earnings drag from non-core operations. Re-rating catalysts: better-than-expected quarterly earnings, and new project announcements.

Source: CGS-CIMB Research - 2 Nov 2023