Ranhill Energy and Resources Bhd (RANHILL), which is en-route for a listing on 31 Jul, offers two different distinct earning streams: (i) Water and Power concession businesses with stable earning streams and (ii) Oil & Gas segment where earnings growth could be explosive. The Water division, which accounts for more than 50% of group’s earnings, is one of the beneficiaries of the high profile Iskandar Malaysia development and the RM60b RAPID project. While Oil & Gas earnings are likely to be challenging in the near term as the key project - the Melaka RGT is coming to an end, its Power segment which owns the largest IPP in Sabah will provide good earnings visibility for the next 20 years. In all, FY13 earnings are expected to decline given the recurring RM54m Sukuk expenses and RM18m corporate expenses but FY14 earnings are expected to rebound by 17% mainly underpinned by the Water segment. We use a breakup valuation methodology to derive a fair value of RM1.90/share, implying CY14 10.4x PER. At RM1.85/ share, we believe the IPO is fair as it valued at CY14 10.1x PER which is in line with FBMKLCI small cap valuation. Nonetheless, for dividend seeking investors, RANHILL could be a suitable candidate given its sustainable 4%-5% yield.  

Rapid development in Johor and China to lead water division growth. Given its exclusive licence from the Minister of Energy, Green Technology and Water to provide “source-to-tap” water supply services to end-customers in the entire State of Johor, and its 30-years concession to lease water infrastructure from Pengurusan Aset Air Bhd (PAAB), RANHILL should benefit from the rapid development in Iskandar Malaysia and the Petronas RM60b RAPID project in Pengerang. On the other hand, RANHILL is currently carrying out investment evaluation and feasibility studies on several water and wastewater treatment projects in China which target to increase water treatment capacity from 270MLD to up to 1,000MLD over next 3 years from 2012.  

Tie-up with global players to boost brand name and  contract wins.  Through its long-term relationship with WorleyParson, RanhillWorley (RWorley) has access to over 40,000 global personnel, as well as engineering/project management delivery tools, making RWorley a competent and cost competitive player. Moreover, RANHILL has also entered into a 3-year Memorandum of Agreement with Samsung in April 2013 to co-develop  and pursue mutually beneficial business dealings for the tender of EPCI projects worldwide. By leveraging on this relationship with WorleyParson and Samsung, RWorley is wellpositioned to secure Enhanced Oil Recovery (EOR) and Engineering, Procurement, Commissioning and Installation (EPCI)  contracts both locally and globally.  

Steady power play in Sabah. Its power business is operated through 60%-owned subsidiary Ranhill Powertron I (RPI) and 80%-owned subsidiary Ranhill Powertron II (RPII) with  PPAs with the Sabah Electricity to provide an aggregate capacity of 380MW for 21 years under a long-term concession agreement. This concession agreement will ensure a  stable secured power earning stream for RANHILL.

Forget FY13 and look at FY14. We project the group to post RM150.4m and RM175.5m net profits for FY13-FY14 from RM199.8m in FY12. The sharp decline is mainly due to recurring RM54m Sukuk expenses and RM18m corporate expenses after the listing which was previously borne by the previous listed vehicle – Ranhill Bhd. Nonetheless, top line growth is seen at 1%-7% driven mainly by the Water segment with 6.8%-7.0% growth.

Risks to the stock are: (i) downturn in oil & gas sector; (ii) slow-thanexpected China water industry growth; and (iii) inability to secure new PPAs and water concessions upon expiry of current ones.

Source: Kenanga