Analyst says YTL Power's Ranhill Utilities buy a strategic fit despite negligible near-term earnings impact

KUALA LUMPUR: YTL Power International Bhd's move to increase its stake in Ranhill Utilities Bhd is seen as a strategic fit for the group despite insignifcant near-term earnings impact.

"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. As such, 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 RM47-55 million in financial year 2024 (FY24) forecast- FY26 forecast, which, at a 53.19 per cent stake, is less than one per cent of YTLP's FY25F net earnings," RHB research said in its note today.

The offer price of 99.5 sen a share represents a steep discount of 37 per cent to the last traded price of RM1.57 prior to the announcement, as Ranhill Utilities' share price has gained 76 per cent year-to-date. Valuation wise, it implies 27-24 times FY24F-25F (Dec) price to earnings ratop (P/E) as well as 1.6 times FY24F-25F (Dec) price-to-book value.

RHB research deemed the P/E pricy, adding that YTL Power's P/E stood 14 times FY25 forecast.

It reiterated its "Buy" call on the stock, while maintaining its RM6.68 a share.

It is currently trading at RM5.06 a share.

RHB research maintained its earnings estimates on YTL Power pending the completion of the acquisition.

YTL Power's net gearing is at 1.19 times as of the third quarter of financial year 2024 (3QFY24), but this acquisition should not strain its balance sheet significantly, given its healthy operating cash flow and solid cash balance of RM8.7billion as of 3QFY24.

RHB research expects PowerSeraya's earnings moderation to be largely anchored by Wessex Water's earnings recovery.

It remains positive over YTL Power's long-term earnings potential from its artificial intelligence-data centre (AI-DC) development, while the near-term catalyst will be the conclusion of the offtaker for its first 20MW (out of 100MW) AI-DC.

Downside risks to its projections include weaker-than-expected plant performance and higher-than-expected operating costs.

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