Ranhill a deeply undervalued stock with solid dividend yields
KUALA LUMPUR: Ranhill Holdings Bhd (Ranhill) has been viewed as a deeply undervalued and overlooked stock, with solid dividend yields and a promising outlook particularly given its solid proxy to the water-sewerage integration drive and its venture into geothermal power in Malaysia.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) highlighted this in a recent report and initiated its coverage on the stock with a ‘buy’ call, premised on its solid eight epr cent dividend yields backed by assetlight water business, double-digit earnings gap-up from scheduled rate hike for water operation, emerging play in the renewable energy sector, imminent entry into sewerage services, and favourable risk reward at current depressed valuations of just eight-folds in the financial year of 2019 forecast (FY19F) earnings.
“Ranhill is an overlooked, hence under-institutionalised, 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 independent power producer (IPP) in Sabah,” the research team pointed out.
Backed by cash flows from its asset-light water operations and its management’s commitment to an at least 60 per cent payout, MIDF Research said, Ranhill entails solid dividend yields of eight per cent while its earnings is set to gap-up from FY19F on an impending water tariff hike which will drive a 12 per cent growth next year.
Aside from that, it said: “Via a 26.7 per cent stake in Tawau Green Energy Sdn Bhd (TGE) Ranhill is the only listed play into the country’s first geothermal development project, located in Tawau, Sabah.”
It noted that the group is targeting and has received approval for an initial gross capacity of 37MW (net output of 30MW).
“Based on initial studies though, the area could entail sufficient resource to power up to 120MW power generation capacity, which could increase Ranhill’s current gross power capacity of 380MW by up to 32 per cent.
“On top of this, Ranhill is also looking to almost double its stake in the project to 50 per cent in the near future,” it said.
It noted that the project is backed by a 21-year Renewable Energy PPA (REPPA) and lucrative FiT rates.
It also said, the project has a conservative 30MW initial capacity and a full potential of 100MW capacity. It further pointed out that TGE is expected to generate attractive IRR in the low teens and could raise its valuations by a further four per cent.
“Ranhill is in fact looking to raise its stake in TGE to 50 per cent which can in turn almost double the value accretion,” it added.
The research team noted that the project is expected to generate an attractive 11 to 12 per cent interla rate of return (based on 45sen/kwh rates in the /21-year REPPA/30MW net capacity) and entails an estimated equity net present value (NPV) of RM165m.
“If the first 30MW phase of the project is successful, TGE could raise our sum-of-parts-based target price (RM1.15 per share) by four per cent based on the current 26.7 per cent stake. This could rise to eight per cent if Ranhill successfully raises its stake in TGE to 50 per cent,” MIDF Research projected.
The research team also pointed out that despite a 21-year REPPA (which should allow TGE to recover its development cost and allow a return on the project), a geothermal plant typically has a life of up to 30 years before major refurbishments are required, while the site lease goes up to 50 years under the current agreement with Sabah’s government.
As for its role in the water-sewerage integration drive, it noted that 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 Memorandum of Understanding (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 per cent earnings expansion for Ranhill,” it added.
All in, MIDF Research said, Ranhill’s balance sheet has been successfully de-geared since its 2016 IPO, while attractive dividend yields cushions downside and as such, it pegged an optimistic view on the stock due to its deep valuations.