• Keep SELL and MYR1.15 TP, 15% downside. YTL Power’s (YTLP MK, BUY, TP: MYR6.68) 70% owned subsidiary, SIPP Power is acquiring a 31.4% stake in Ranhill Utilities from its major shareholder, Tan Sri Hamdan Mohamad for MYR405.2m or MYR0.995/share. As a result, YTLP’s aggregate stake in RAHH will rise to 53.2% from 21.8% – triggering a mandatory takeover offer (MTO) to the remaining shareholders.

• Is the offer price reasonable? We view the offer price of MYR0.995/share to be unreasonable for RAHH’s investors as the said price is lower than our TP of MYR1.15/share which has priced in the recent events such as the domestic water tariff hike. Additionally, the offer price of MYR0.995/share is at a steep 37% discount to the last traded price of MYR1.57/share prior to the announcement. The offer price is also lower than the 5-day and 12-month volume-weighted average price by 32% and 10.5%. Meanwhile, the implied valuation for the acquisition is around 25x FY25F P/E and 1.6x FY25F P/BV vs a 39x FY25F P/E and 2.5x P/BV based on 27 May’s closing price of MYR1.57. As such, we are of the view that investors should not accept the offer and are better off selling their shares in the market.

• Post takeover, YTLP intends to maintain the listing status of RAHH. In the event RAHH does not comply with the public spread requirement – YTLP may have to rectify the non-compliance or Bursa Malaysia may accept a percentage lower than 25% of total listed shares (excluding treasury shares) if it is satisfied that such a lower percentage is sufficient for a liquid market in such shares. The acquisition and MTO are expected to be completed by Jun 2024 and 3Q24, respectively.

• RAHH appears to be a strategic fit for YTLP via its water supply business (via Wessex Water) and power generation arm (via PowerSeraya) track record. However, synergies may only likely be realised in the long run as this is YTLP’s maiden venture into water supply and treatment (through RanhillSAJ) and also power generation business (through Ranhill Sabah Energy I and II in Sabah) in Malaysia.

• Forecasts and valuation. No changes to our earnings estimates and therefore maintain our SOP-derived TP of MYR1.15 which bakes in a 4% ESG premium. Without any near-term sizeable catalyst in sight – valuation remains hefty at 33x FY25F P/E (above +2SD from its 5-year mean P/E).

• Upside risks to our call: Faster-than-expected realisation of synergies of RAHH being a subsidiary of YTLP.

Source: RHB Research - 29 May 2024