PETALING JAYA: The increased stake in Ranhill Utilities Bhd bodes well for YTL Power International Bhd ’s earnings growth over the long term.
While the near-term impact would likely be muted, YTL Power’s controlling stake in Ranhill is expected to strengthen the company’s position in the lucrative Malaysian utilities space.
As such, most brokerages view YTL Power’s move to acquire an additional 31.4% stake in Ranhill for a cash consideration of RM405.2mil, or 99.5 sen per share, in a positive light.
The acquistion was via YTL Power’s 70%-owned subsidiary SIPP Power Sdn Bhd.
Upon completion, SIPP Power’s stake in Ranhill would increase from 2.9% to 34.3%, while YTL Power’s stake in Ranhill would increase from 21.8% to 53.2%, effectively triggering a mandatory takeover offer for the remaining shares in the company.
RHB Research said the stake increase in Ranhill was a strategic move for YTL Power to complement the group’s portfolio, while strengthening its footprint in Johor, given its ambitious data centre development.
“We believe it could be a strategic fit for YTL Power, 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,” the brokerage said.
“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 RM47mil-RM55mil in financial year 2024 (FY24) to FY26, which at a 53.19% stake is less than 1% of YTL Power’s FY25 estimated earnings,” it added.
RHB Research has reiterated a “buy” call on YTL Power, with a target price of RM6.68.
Also calling YTL Power a “buy”, MIDF Research kept its target price for the counter at RM6.35.
“Overall, we see this acquisition as mid to long-term positive for YTL Power,” the brokerage said.
It noted that Ranhill would give YTL Power access to exclusive Johor water operations, allowing it to capitalise on prospects from the Johor-Singapore Special Economic Zone and potential demand from Johor’s data centre hubs.
Additionally, it said the synergistic expertise in water operations could drive further efficiency of Ranhill’s Johor water business.
“The deal also gives YTL Power access to the Sabah electricity market whereby Ranhill controls the largest independent power producer share, solidified further by a new 100-megawatt (MW) combined cycle gas turbine due for commercial operation date in 2026,” MIDF Research said.
“In addition, Ranhill has been making headways into renewable energy with the commissioning of its large-scale solar (LSS) 4 plant in February 2024,” it said.
TA Research, which maintained its “overweight” call on YTL Power at RM6.35, said the acquisition of additional Ranhill shares at 99.5 sen was attractive, as it was lower than the brokerage’s target price of RM1.06 for Ranhill.
“The acquisition is earnings accretive but is not expected to immediately move the needle for YTL Power, contributing merely 0.4% additional earnings for FY25-FY26.
“However, by having a controlling stake in Ranhill, YTL Power can further improve Ranhill’s bottom line by leveraging on the group’s experience in managing Wessex water in the United Kingdom and Power Seraya in Singapore,” TA Research said.
“YTL Power can also gain exposure in LSS farm and utilise Ranhill’s experience in LSS to build the solar farm for its 500MW green data centre.
“The potential synergy from the acquisition is immense,” it added.
Meanwhile, CGS International Research (CGSI) said the increased stake in Ranhill would offer YTL Power an avenue for a swift re-entry into Malaysia’s utilities sector, following a 2.5-year hiatus pursuant to the expiry of the power purchase agreement for its Paka Power Station gas power plant in June 2021.
Despite being positive on the deal, CGSI kept its “hold” call on YTL Power, with a target price of RM5.50, pointing out that the counter was fairly valued at current levels.
CGSI said despite the benefits, the immediate earnings impact on YTL Power from the increased stake in Ranhill would likely be muted.
In general, the earnings outlook for Ranhill was encouraging, CGSI said, noting growth would be driven by the potential increase in demand for water supply in Johor; incremental earnings from its 100MW gas-fired power plant in Sabah; and a full quarter’s contributions from its maiden 50MW LSS4 solar farm in Bidor, Perak from the second quarter of 2024.