INVESTMENT HIGHLIGHTS

• FY18 earnings spot on
• Dividends slightly higher than expected

• Proposes bonus issue, dividend reinvestment plan and longterm reinvestment plan

• Re-affirm BUY at higher TP of RM1.60

FY18 earnings spot-on, dividends outperformed. Ranhill reported FY18 net profit of RM45.5m after taking a RM19m one-off, non-cash impairment of its 26.7% stake in Tawau Green Energy (TGE) in 4Q18 (please refer to note dated 30th January 2019 for details on this). Excluding this, FY18 core earnings stood at RM64.5m. The reported profit accounted for 99.2% of our estimates while core earnings accounted for 99.9% - the TGE impairment was marginally higher as Ranhill also provided for some advances to TGE. We would not expect any more significant impairment on TGE going forward. An interim and final dividend of a collective 2sen was declared for 4Q18, bringing full year dividends to 6sen, slightly higher vs. our 5.9sen (FY18).

Key takeaways. FY18 revenue growth (+5.5%) was mainly driven by the water segment (+7%yoy) given growth in volume of consumption at 80%-owned Ranhill SAJ. SAJ’s pre-tax is lower by 19%yoy given the effect of unwinding of interest charge (the process of reversing the difference between the present value of service concession assets and fully accrued service concession obligations) for SAJ which tends to be front-loaded and tapers off over the concession period – in this case, Ranhill SAJ’s 3-yearly water operator license (OP4: Operating Period-4) which was renewed effective Jan18. Since the licensing regime is short compared to a typical concession, the impact of unwinding of interest can be pronounced. Given the imbalance in recognition of unwinding of interest charges i.e. FY17 reflected the final year of Ranhill’s OP3 hence is the lowest in that licensing cycle whereas FY18F reflects the 1st year of its OP4 hence is significantly higher, earnings showed a decline. The power division saw flattish revenue growth but earnings improved due to lower maintenance overheads.

Corporate exercise proposals. Ranhill has proposed: (1) A 1 for 5 bonus issue (2) Establishment of a dividend reinvestment plan (DRP) (3) Long-term incentive plan for staff of up to a maximum 10% of outstanding shares. The DRP allows Ranhill to retain cash while maintaining dividend payout, but entails gradual dilutive impact over the longer run for shareholders opting for cash dividends. The LTIP will be slightly dilutive depending on actual planned issuance. The proposals are subject to shareholders approval at an EGM to be convened.

Source: MIDF Research - 1 Mar 2019