• Maintain BUY, with new SOP-derived MYR0.67 TP from MYR0.66, 76% upside and c.6% yield. Ranhill Utilities received a notification letter from the Energy Commission (EC), dated 8 Aug 2022, informing the company of the extension of the effective period of power purchase agreement (PPA) for the 50MWac large scale solar photovoltaic plant facility at Batang Padang, Perak under the Large Scale Solar 4@MEnTARI (LSS4 project). We believe this is a good entry point on share price weakness, as the stock is trading at about -1.25SD from its 5-year mean EV/EBITDA.

• Main details of extension period. The effective period of the PPA for the LSS4 project in Perak has been extended by four years, bringing the total period to 25 years from 21 years. Other than that, the financial closing date has been delayed to 30 Sep 2022 (from 30 Jun 2022) while the scheduled commercial operation date will be on 31 Dec 2023 (instead of 30 Jun 2023). As such, the PPA is planned to commence further until end 2048.

• Our thoughts. This latest development regarding the PPA of LSS4 projects is not a surprise amid the higher equipment prices such as solar panels which rose c.20%. As such, we view this PPA extension for the LSS project as positive for Ranhill’s venture into the solar space, as it enables the company to recoup its investments more efficiently and slightly improve the internal rate of return (IRR). Under the 21-year period, our DCF projection for the LSS4 project at Perak was at 6.7%. After adjusting for the 4-year extension, the latest projected IRR for the LSS4 project at Perak is at 7.3%.

• Earnings and valuation. No changes made to our earnings estimates as we had already conservatively assumed that operations of the LSS4 project would commence after 31 Dec 2023. Meanwhile, our DCF valuation per share for the LSS4 project under our SOP methodology has been adjusted to MYR0.05/share from MYR0.04/share amid the net effect of extending the PPA period by another four years and higher equipment prices. As such, we arrive at a new SOP-derived TP of MYR0.67 (previously MYR0.66) after imputing an ESG premium of 2% for its 3.10 ESG score, based on our in- house proprietary methodology. Potential rerating catalysts: Higher than-expected rate hikes for its Johor water operations, positive outcome for its ASEAN expansion plans ie source-to-tap water project in Indonesia, and project wins related to water and renewable energy.

• Risks to our call: Licensing risks, timeliness of tariff revisions, lower-than-expected water consumption and developer contributions, escalating costs for its water business, and Ranhill failing to meet the capacity and energy payment conditions for both its power plants.

Source: RHB Research - 11 Aug 2022