• Keep BUY and MYR2.43 TP, 12% upside with c.3% FY24F (Jun) yield.Although the news of YTL Power acquiring an 18.87% stake in RanhillUtilities (RAHH MK, BUY, TP: MYR0.72) caught us by surprise, we believeit could be a strategic fit for the former. This is largely due to its experiencein water treatment and power generation, even as it continues to solidify itsfootprint in Johor, where it is also developing data centres and solar parks.

• Buys substantial stake in RAHH. YTLP announced that it has become asubstantial shareholder of RAHH after acquiring 243.3m shares or a18.87% stake in the latter. We believe the block of shares was acquiredfrom Cheval Infrastructure Fund LP, which was also holding 18.8% stakeprior to that. We estimate the total investment at MYR141m, assuming theblock of shares was purchased at MYR0.58/unit – which implies valuationsof 15.9x FY24F P/E and 0.9x FY24F P/BV.

• Ranhill overview. Ranhill has three segments – environment, engineeringservices and energy. The environment segment was the largest revenuecontributor, accounting for 68% of its total MYR1.7bn revenue in FY22. Thisis followed by engineering services (16.7%) and energy (15.3%). The bulkof the environment segmental revenue comes from being Johor’s sole wateroperator – where it manages 46 water treatment plants with a total dailycapacity of 2.13bn litres. Meanwhile, the energy division entails twocombined cycle gas turbine or CCGT power plants with a capacity of190MW each in Sabah. Ranhill also owns a 50MW large-scale solar or LSS4 solar farm with a commercial operation date scheduled for end-2023. ITalso intends to participate in more solar projects including the CorporateGreen Power Programme or CGPP. Another catalyst for the long run wouldbe its engineering services segment, via subsidiary Ranhill Bersekutupotentially securing any consultant-related services package from the KualaLumpur-Singapore High Speed Rail (HSR) project.

• Could be a strategic fit for YTLP. Although the acquisition caught us bysurprise, we believe it could be a strategic fit for YTLP, given its experiencein both water treatment and power generation. This will also furtherstrengthen its footprint in Johor, where the company is also developing datacentres and solar parks. There should not be an impact on earnings for now,since YTLP’s stake is still below the 20% threshold. As such we maintainour earnings estimates for the company. YTLP’s net gearing is at 1.37x asof FY23, but this acquisition should not strain its balance sheet significantly,given its healthy operating cash flow and solid cash balance of MYR9bn.

• Stay BUY. Our unchanged MYR2.43 TP includes a 2% ESG discount,based on YTLP’s ESG score of 2.9. Downside risks: Weaker-than-expectedplant performance, and higher-than-expected operating costs.

Source: RHB Securities Research - 2 Nov 2023