INVESTMENT HIGHLIGHTS

• Possible impairment of stake in TGE in upcoming results

• Exploring alternatives to revive project

• RM18.7m accounting impact to FY18F net profit, underlying earnings intact

• Maintain BUY at unchanged TP of RM1.30

Possible impairment in 4Q18. Ranhill’s 4Q18 results due next month could be hit by an RM18.7m impairment of its 26.7% stake in Tawau Green Energy (TGE). TGE was undertaking a geothermal development project in Tawau, Sabah and had secured a 21-year RePPA with SESB (COD in FY20) for an initial 30MW capacity. However, given little progress on the project since 2017, The Ministry of Energy, Science, Technology, Environment and Climate Change (MESTECC) had revoked the permit.

Lacking financial muscle? Ranhill effectively acquired its 26.7% stake in TGE in Sep 2017. A large chunk of the amount was initially a loan which was later converted into an equity stake. Progress of the geothermal development had stalled in 2017, presumably given TGE’s lack of financial muscle. TGE was understood to be at the test drilling stage and was to progress into production well drilling. This would have required much larger capital (estimated at an additional RM88m) on top of the RM70m already invested in shareholders’ equity. At the project’s stage of development, TGE has to rely almost entirely on equity injection as the project had not reached a bankable stage yet.

Exploring alternatives. Ranhill was previously in talks to buy out its partners in TGE, prior to the permit cancellation. Following the termination however, we understand Ranhill is now exploring reapplication of the geothermal development permit directly instead of via TGE. In terms of the land concession, the previous terms agreed between TGE and the State Government was for occupational permit and right of use of Sabah Park and Sabah Forest sites specifically for the purpose of geothermal development. Now that TGE has lost the geothermal development permit, it is uncertain if the agreement between TGE and the State Government regarding the use of the site still holds.

Forecasts conservatively excluded TGE potential. Our current projections had conservatively excluded any future earnings contribution from TGE’s geothermal potential. However, we revise down FY18F net profit by 29% (core net profit unchanged) to factor in the potential impairment on Ranhill’s stake in TGE. We conservatively assume the whole carrying value of the stake of RM18.7m is written off in 4Q18. Our FY19F/20F remains unchanged. Notwithstanding the non-cash and importantly, non-recurring impairment charge, our underlying earnings forecasts remain intact driven by Ranhill’s existing water operations in Johor and power operations in Sabah, mainly. Our dividend forecasts also remain intact.

Valuations intact. The FY18F earnings revision does not impact our SOP-derived TP for Ranhill. Our BUY call and TP of RM1.30 remains unchanged. Key catalysts: (1) Scheduled rate hike for Johor water (2) Johor water-sewerage integration (3) RM500m NRW-reduction contract wins.

Source: MIDF Research - 31 Jan 2019