Highlights

Post restructuring, Ranhill Energy & Resources (Ranhill) has transformed into a formidable group, with 3 divisions – 1) Oil & Gas; 2) Power; and 3) Environment (Water). O&G: Leveraged on the international well-recognized expertise of WorleyParsons (listed in Australia), it provides engineering services (See Figure #1). It is one of the only two WorleyParsons “global hubs” for mega decks, floating facilities for petroleum and LNG.

Power: Strong and stable cash flow from its 21-yr (end 2029- 2032) concessionaire of 2 x 190MW combined-cycle gas power plants in Sabah. The plants are operating at full capacity now. The PPA contracts include full cost past through of higher fuel gas prices.

Environment: Strong and stable earnings. Major contribution from 80% owned SAJH’s water treatment (capacity of 1,986 MLD) and supply concessionaire (3-yr period on renewable basis) in Johor. SAJH entered into asset sales-andleaseback for 30 yrs with PAAB under government’s effort to restructure the water industry. SAJH’s net profit margin is kept at 9%. Additional earnings from RWT’s (100% owned post IPO) concessions in China and Thailand (See Figure #5). RWT targets to increase the capacity to 1,000 MLD by 2015 in China from current 270 MLD.

Ranhill continue to operate on asset-light business model (low capex requirements), with the exception of BOT projects for Sabah power plant and oversea water concessionaires.

Catalysts

O&G division is expected to leverage on the growing capex commitment of Petronas under ETP program in Malaysia (See Figure #2) as well as international O&G projects. Furthermore, it has signed 3-yr MOU to partner with Samsung to tender for O&G projects worldwide.

Secured and stable cash flow from Power and Environment divisions to provide war chest for business expansion (or even acquisition) opportunities on concessionaires or provide stable dividend payments. Ranhill has dividend payout policy of 50-70% of net profits.

Earnings upside from the implementation of the much delayed Green Bill, which allow SAJH to secure additional earnings from waste management in Johor.

China presents huge opportunities for RWT, as the country develops and becomes increasingly environmental conscious. RWT has signed several MOUs to develop water and wastewater treatment in China (See Figure #6).

Risks

• Delay in O&G projects domestically and internationally.
• Regulations on the O&G, Power and Water industry.
• Discontinuation of SAJH 3-yrs contract.
• Contamination of water supply especially Johor.

Comment

We expect its core earnings to grow from RM116m in FY13 to RM207m in FY15, on the back of continuous growth of O&G and Environment divisions.

Valuation

We opined that the stock has an indicative value of RM2.20 based on SOP (See Figure #9) based on combination of P/E and DCF methodologies.

Source: Hong Leong Investment Bank Research - 9 Jul 2013