RHB Investment Research Reports

YTL Power - Uplifting Stake in Ranhill; Reiterate BUY

Publish date: Wed, 29 May 2024, 11:11 AM
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  • Keep BUY and MYR6.68 TP, 34% upside and c.2% FY25F (Jun) yield. We believe the stake increase in Ranhill Utilities (RAHH MK; SELL; TP: MYR1.15) is a strategic move for YTL Power to complement its portfolio while strengthening its footprint in Johor given its ambitious data centre development. Near-term impact is likely to be muted, but we see potential synergies in the longer run.
  • Acquiring a larger stake in RAHH. YTLP’s 70% owned subsidiary SIPP Power is acquiring a 31.42% stake in RAHH from its major shareholder, Tan Sri Hamdan Mohammad for MYR405.2m or at MYR0.995/share. Subsequent to this, YTLP’s aggregate stake in RAHH will be lifted to 53.19% (from 21.77%), triggering a mandatory takeover offer (MTO) to the remaining shareholders. YTLP intends to maintain the listing status of RAHH. The acquisition and MTO are expected to be completed by Jun 2024 and 3QCY24, respectively.
  • Complement current portfolio. The offer price of MYR0.995/share represents a steep discount of 37% to the last traded price of MYR1.57 prior to the announcement as RAHH’s share price has gained 76% YTD. Valuation wise, it implies 27-24 x FY24F-25F (Dec) P/E as well as 1.6x FY24F-25F (Dec) P/BV. In terms of P/E, it seems rather pricy as it is above +2SD from its 5-year mean and also above YTLP’s current valuation of 14x FY25F (Jun) P/E. As for P/BV, the price tag is below YTLP’s current valuation of 2.0x FY25F (Jun) P/BV. We believe it could be a strategic fit for YTLP given its experience in both water treatment and power generation. This will further strengthen its footprint in Johor, where the company is also developing data centres and solar parks. As such, we expect synergies in the long run despite near-term earnings impact being rather insignificant given Ranhill is estimated to generate a net profit of MYR47-55m in FY24F-26F, which, at a 53.19% stake, is <1% of YTLP’s FY25F net earnings. We maintain our earnings estimates pending the completion of the acquisition. YTLP’s net gearing is at 1.19x as of 3QFY24, but this acquisition should not strain its balance sheet significantly, given its healthy operating cash flow and solid cash balance of MYR8.7bn as of 3QFY24.
  • Stay BUY. Our SOP-based TP is kept at MYR6.68 with the incorporation of a 2% ESG discount based on its 2.9 ESG score. Moving forward, we believe PowerSeraya’s earnings moderation will be largely anchored by Wessex Water’s earnings recovery. We remain positive over its long-term earnings potential from its artificial intelligence-data centre (AI-DC) development, while the near-term catalyst will be the conclusion of the offtaker for its first 20MW (out of 100MW) AI-DC. Downside risks: Weaker-than-expected plant performance and higher-than-expected operating costs.

Source: RHB Research - 29 May 2024

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