Ranhill oh Ranhill

INVESTMENT HIGHLIGHTS

We initiate coverage of Ranhill with a BUY and TP of RM1.15/share. At just 8x FY19F earnings, Ranhill is a deeply undervalued utility play paying out solid 8% dividend yields

Via a stake in Tawau Green Energy, Ranhill is an early cycle play into the development of geothermal power in Malaysia

More importantly, Ranhill is a solid proxy to the water sewerage integration drive, which could drive a double-digit earnings expansion

Near-term, earnings is expected to gap-up from scheduled rate hike for Johor water operations

Initiating coverage with a BUY. We initiate coverage of Ranhill Holdings (Ranhill) with a BUY and a TP of RM1.15/share. Our conviction is premised on: (1) Solid 8% dividend yields backed by asset-light water business (2) Double-digit earnings gap-up from scheduled rate hike for water operation (3) Emerging play in the renewable energy sector (4) Imminent entry into sewerage services (5) Favourable risk reward at current depressed valuations of just 8x FY19F earnings.

Overlooked potential. Ranhill is an overlooked, hence underinstitutionalised, utilities play with exposures both the water and power sectors. The group is the most profitable water operator in the country with a solid 19 years track record in Johor and the largest IPP in Sabah. Backed by cash flows from its asset-light water operations (mainly) and management’s commitment to an at least 60% payout, Ranhill entails solid dividend yields of 8%. Earnings is set to gap-up from FY19F on an impending water tariff hike which will drive a 12% growth next year.

Emerging renewable energy play. Via a 26.7% stake in Tawau Green Energy Sdn Bhd (TGE) Ranhill is the only listed play into the country’s 1st geothermal development project, located in Tawau, Sabah. Backed by a 21-year REPPA and a conservative 30MW initial capacity (full potential of 100MW capacity), TGE is expected to generate attractive IRR in the low teens and could raise our valuations by a further 4%. Ranhill is in fact looking to raise its stake in TGE to 50% which can in turn almost double the value accretion.

Proxy to water-sewerage integration. In line with the direction set by the Water Services Industry Act 2006 and on the back of a strong track record in Johor, Ranhill had signed an MoU with Indah Water to explore joint billing and ultimately, take-over Johor’s sewerage operations. A switch to a volumetric tariff regime could turn around the currently loss making sewerage operations (under IWK) and has the potential to drive a massive 30% earnings expansion for Ranhill.

Deeply undervalued. At just 7.6x FY19F PE, Ranhill is deeply undervalued. At current market cap, implied valuation for its water business is a mere 7x, well below Penang-based peer, PBA Holdings’ 10x PE and the broader utilities sector’s average PE of 11x. Balance sheet has been successfully de-geared since its 2016 IPO, while attractive dividend yields cushions downside.

Key catalysts:

(1) Schedule rate hike for Johor water

(2) TGE progress into production well drilling

(3) Johor water sewerage integration

Source: MIDF Research - 20 Sept 2018