KEY INVESTMENT HIGHLIGHTS

• Favorable outcome in legal tussle to claim amount paid for SM Hydro stake back in 2017

• SM Hydro was part of consortium to undertake the now rescinded, Sandakan CCGT power plant project in East Sabah

• Possibilities of a RM7m write-back in 4Q20; accounts for a substantial 11% of our FY20F earnings.

• BUY maintained at unchanged TP of RM1.25

What’s new? The High Court had made an order in favor of Ranhill in regards to Ranhill’s application to strike out an amended counterclaim of RM14m by a Dato’ Mohd Fakrunizam. To give context, Ranhill had previously filed a claim against Dato’ Mohd Fakrunizam whereby the High Court has made an order in favor of Ranhill, ordering the former to refund Ranhill an amount of RM7m.

Some context on the issue. The RM7m sum claimed by Ranhill from Dato’ Mohd Fakrunizam represents partial payment for the acquisition of shares in SM Hydro Energy Sdn Bhd (SM Hydro) back in 2017. SM Hydro was part of a consortium (70:30 joint venture between Sabah Development Energy Bhd and SM Hydro), which was previously awarded the 300MW CCGT power plant project in Sandakan, East Sabah. The Sandakan CCGT plant was intended to address the severe power undercapacity in East Sabah, but in 2018, was cancelled by the Energy Commission as the then, MESTECC (Ministry of Energy, Science, Technology, Environment and Climate Change) opted instead to strengthen the West-to-East grid to enable a more efficient supply of power from West (which is oversupplied) to East Sabah – the current 275kv lines are only able to dispatch 216MW due to constraints of existing transmission tower rating, whereas the grid upgrade would enable an additional 200MW to be dispatched from West Sabah.

A substantial positive development. The legal development is a positive for Ranhill. The entire amount of RM7m had previously been impaired hence pursuant to the latest order, suggests the possibility of a write-back, though this would be based on the actual amount recovered. Our checks with the management last Friday however, suggest strong possibilities of a write-back in 4Q20. More importantly, the RM7m potential write-back accounts for a substantial 11% of our FY20F net profit of RM64m.

Recommendation. Maintain BUY on Ranhill at unchanged SOP-derive TP of RM1.25. Potential catalysts: (1) Expansion of water operations (2) Potential extension of RP1 concession (3) Scheduled rate hike for Johor water operations (4) Johor water-sewerage integration.

Source: MIDF Research - 5 Oct 2020