We believe that Ranhill Utilities Berhad (Ranhill) is one of the front runners in its bid for a 100MW Combined Cycle Gas Turbine tender in West Coast Sabah. We reckon that Ranhill’s established track record in Sabah will boost its chances of securing this project. To recap, Ranhill is the largest Independent Power  Producer in Sabah, with a 40% market share based on installed capacity.  Furthermore, recent developments reinforce our view that power generation plans in Sabah will be expedited. To recap, a bill that will pave the way for the formation of the Sabah Energy Commission will be tabled at the State Legislative  Assembly on Apr-23. Based on our estimates, if Ranhill is successful in its bid to secure this new plant, this would result in NPV accretion of 15 sen/share to  Ranhill’s target price (TP). We maintain our Buy recommendation on Ranhill with a TP of RM0.55.

High Chance to Secure Gas Plant Project at Sabah. We believe that Ranhill  Utilities Berhad (Ranhill) is one of the front runners in its bid for a 100MW  Combined Cycle Gas Turbine (CCGT) plant tender at West Coast Sabah. This new project is expected to achieve its first Commercial Operation Date (COD) on Apr-24 and final COD on Jan-25. Note that under the 12th Malaysian Plan (RMK12), a  new power plant will be constructed, and the Sabah East-West Grid transmission will be upgraded. The latter will enable the dispatch of an additional 400MW of electricity supply from Sabah’s West Coast to the East Coast. To recap, Sabah’s East  Coast faces a supply deficit due to a lack of generation capacity. This is, in contrast,  to the supply surplus on the West Coast.

New Plant will Reinforce Market Leadership. Moreover, we believe that  Ranhill's established track record in Sabah will boost its chances of securing this project. To recap, Ranhill is the largest Independent Power Producer (IPP) in Sabah,  with a 40% market share based on installed capacity. The Group currently owns two  CCGT power plants at Kota Kinabalu Industrial Park. This is via its subsidiaries,  Ranhill Powertron Sdn Bhd 1 and 2 (RP1 & RP2). Each Plant has a capacity of 190MW  and 21-year Power Purchase Agreements (PPA) with Sabah Electricity Sdn Bhd  (SESB) under Build-Own-Operate concessions. The latter is owned by Tenaga  Nasional Berhad (stake: 82.75%) and the Sabah state government. The PPA for RP1's  Plant (60% stake) at Teluk Salut will expire in 2029, whilst RP2's (80% stake) is due for expiry in 2032. Ranhill is currently in negotiations for RP1's extension for up to  10 years.

Changes at the Top Will Expedite Award. Furthermore, recent developments reinforce our view that power generation plans in Sabah will be expedited. To recap,  recently, in Aug-22, Sabah Chief Minister Datuk Seri Hajiji Haji Noor revealed that a bill that will pave the way for the formation of the Sabah Energy Commission would be tabled at the State Legislative Assembly on Apr-23. With the setting up of the  Sabah Energy Commission (SEC), the State will have total control in managing its energy resources, especially electricity. In tandem, the state government would move to reacquire SESB. According to Hajiji, the SEC would be set up first to pave the way for a regulatory framework to devolve authority over the matter from the federal government to the State. Additionally, proposed projects to be implemented under the 2022-2041 Sabah Power Supply Generation Development Plan include (1) a 100MW CCGT plant at Kimanis in Sabah’s West Coast and (2) an upgrade of the power distribution grid from Segaliud (Sandakan) to Dam Road (Lahad Datu) and Mengalong (Sipitang) to Lawas, Sarawak.

Estimate NPV/Share Accretion of 15 sen/share. Based on our estimates, if  Ranhill is successful in its bid to secure the 100MW CCGT plant, this would result in an NPV accretion of 15 sen/share to Ranhill’s target price (TP). Key underlying assumptions that underpin our estimates include (1) 21-year PPA (expiry: Dec-45),  (2) 2-year construction period, (3) Ranhill owns 100% stake, (4) capex of RM261mn,  (5) first COD in Jun-24 and final COD in Jan-25, (6) 80:20 debt: equity financing, (7)  capacity rate financial of 38.5 sen/kwH, (8) gas cost of RM10 per mmbtu, (9) 10-year  loan tenure, and (11) project IRR of circa 7%. Nevertheless, we maintain our earnings forecasts at this juncture pending the final project award.

Impact

• Maintain earnings forecasts.

Valuation

• Given the more stable political environment post-Malaysia’s 15th General  Election (end: Dec-23), we lower our CAPM discount rate on Ranhill SAJ to  8.7% (previous: 9%). As a result, our Sum-of-Parts (SOP) target price (TP) is raised to RM0.55 (previous: RM0.45). Our TP implies a modest CY23 forward  P/E of 15.4x. We maintain our Buy recommendation.

Source: TA Research - 29 Dec 2022