This article first appeared in The Edge Malaysia Weekly on June 10, 2024 - June 16, 2024

THE surprise exit of Tan Sri Hamdan Mohamad from Ranhill Utilities Bhd (KL:RANHILL) has paved the way for YTL Power International Bhd (KL:YTLPOWR) to gain a foothold in the water supply sector in Johor.

YTL Power first emerged as Ranhill’s substantial shareholder last November after it bought a substantial stake of close to 19% for RM140 million, or 58 sen per share, from TAEL Management Co (Cayman) Ltd. TAEL is the private equity firm that funded Hamdan during the privatisation of Ranhill Bhd and Ranhill Utilities in 2011.

About two weeks ago, on May 28, YTL Power’s 70%-owned subsidiary, SIPP Power Sdn Bhd, bought Hamdan’s 31.42% equity interest in the utilities company. The share purchase raised YTL Power and SIPP Power’s collective shareholding to 53.14%, triggering a mandatory general offer (MGO).

Hamdan sold his shares for 99.5 sen each on May 28. Prior to the stock’s suspension a day earlier, it was trading at RM1.57, which means Hamdan had sold his shares at a hefty 35% discount to the market price.

The MGO is an inconsequential exercise, as the market is valuing the company higher than the price at which Hamdan had accepted for his shares.

The deal raises the question as to why Hamdan exited the company he founded at significantly below market price?

“Hamdan’s block is a controlling stake in Ranhill. Normally, a controlling block would command a premium; but, in this case, it was not so,” an investment banker observes.

That said, the offer that Hamdan is getting is 72% more than what TAEL agreed to last year.

In recent months, Ranhill has had to deal with at least two major setbacks affecting sentiment on the company.

In April, Johor Menteri Besar Datuk Onn Hafiz Ghazi chided Ranhill for water disruptions in some districts in the state during the Hari Raya festivities. In May, two of its executives, believed to be from the oil and gas division, were picked up by the Malaysian Anti-Corruption Commission (MACC) to assist in investigations.

Nevertheless, some analysts feel that the offer price is fair.

MIDF Research suggests that the deal struck between YTL Power and Hamdan is fair, based on 21 times Ranhill’s FY2025 price-earnings ratio (PER), compared to its current “inflated price”.

“We believe the acquisition of the controlling stake in Ranhill by YTL Power is a reasonably good deal, valuing Ranhill about 18 times its FY2025 forecast PER, a 10% discount to mean PER of 20 times,” it says in a May 28 note.

The research house also estimates that YTL Power’s entry cost for the entire 53.2% stake was RM580 million, based on three transactions — the first involving an 18.9% stake at 58 sen per share last November; the second was a 2.9% stake at 89 sen per share; and the latest was the 31.4% block at 99.5 sen per share.

CGS International Research sees the acquisition of Ranhill as giving YTL Power exposure to Johor’s water sector, renewable energy (RE) opportunities, and a foothold in Sabah’s tight electricity market.

Apart from the Johor water concessions, Ranhill has gas-fired power plants in Sabah and a 50mw solar farm in Bidor, Perak. It complements YTL Power’s water and sewerage concession in the UK and electricity producer YTL PowerSeraya Pte Ltd in Singapore.

“The purchase of a controlling stake in Ranhill allows YTL Power to ease further into the data centre play in Johor. Water is critical for data centres and Ranhill is a key beneficiary because it has the monopoly over water in the state,” a banker says.

Ranhill, via its subsidiary Ranhill SAJ Sdn Bhd, is Johor’s sole water operator. According to its 2023 annual report, Ranhill SAJ operates 46 water treatment plants, with a total water capacity of 2,171 million litres per day.

When contacted by The Edge, YTL Power declined to comment on the acquisition; Hamdan could not be reached for comments.

Water players, including Ranhill, have benefited from a tariff hike in February this year — the first in nine years. Before the hike, Ranhill had bagged a RM283.89 million contract in Johor to reduce non-revenue water (NRW) from January to December 2026.

Earnings-wise, Ranhill saw its net profit decrease 39.2% to RM57.89 million for the financial year ended Dec 31, 2023 (FY2023), from RM95.25 million in FY2022, owing to lower recognition of government grants of RM56.6 million. In FY2022, the company received RM142 million of NRW reduction incentive from the government compared to RM86 million in FY2023.

Ranhill booked a higher revenue of RM2.28 billion in FY2023, however, versus RM1.73 billion in FY2022, thanks to improvements in all its business segments. In 2023, Ranhill said its water business saw a 10% increase in revenue to RM1.27 billion, from RM1.15 billion in FY2022, owing to higher non-domestic tariffs.

Ranhill operates two 190mw combined-cycle gas-fired power plants in Kota Kinabalu, Sabah. In April last year, the group won a contract to build a 100mw gas-fired power plant in Kimanis, Sabah, which will raise its power-generation capacity in the state to 480mw by 2026.

In addition, Ranhill owns and operates a 50mw solar farm in Bidor under Phase 4 of the large-scale solar programme, with a 25-year concession agreement.

As at March 31, Ranhill’s net asset per share stood at 61 sen, with total borrowings of RM946.4 million on the back of cash of RM78.7 million.

YTL Power’s increasing of its stake in Ranhill would have come as no surprise to those who had been following the developments in Johor, especially with the boom in data centres.

“With so many data centres setting up shop in Johor, water is an important utility. It is a strategic move by YTL [Power],” says a source.

YTL Power is making the offer through its 70%-owned subsidiary SIPP Power. It has been reported that the remaining 30% in SIPP Power is linked to former Umno Kota Tinggi division chief, Datuk Daing A Malek Daing A Rahman.

Following Hamdan’s exit, the remaining substantial shareholders in Ranhill are UOB Kay Hian Pvt Ltd, which holds a 9.1% stake for Singapore’s United Overseas Bank Ltd, and the Johor government’s Permodalan Darul Ta’zim Sdn Bhd, with a 9.07% stake. Other notable shareholders include pilgrim fund Lembaga Tabung Haji, with 3.1% equity interest, and state-controlled YPJ Corp Sdn Bhd, with 2.72%.

MIDF Research, meanwhile, suggests that Ranhill shareholders “hold out” for a better offer from YTL Power.

“We reiterate our view that Ranhill is a strategic fit for YTL Power, considering that it is also involved in both the water and power businesses, albeit on a much larger scale,” it says.

“More importantly, we believe the entry of a strong shareholder will pave the way for improved efficiency for Johor water and also allow YTL Power to capitalise on prospects from the Johor-Singapore Special Economic Zone, as well as potential demand from data centre hubs in the state.”

In the last two years, YTL Power has made a slew of announcements related to data centre developments in Johor. It started in 2021, when its subsidiary SIPP Power signed a sale and purchase agreement to buy 664ha of oil palm estates in Kulai, southern Johor, from Boustead Plantations Bhd for RM428.8 million to build a 500mw solar capacity facility and data centres.

The YTL data centre park, dubbed the Kulai Green DC Park and first announced in August 2022, is estimated to be a 500mw data centre hub. Singapore-based Sea Ltd, which owns e-commerce platform Shopee, is the first tenant of the park, which is powered by super computers supplied by Nvidia Corp.

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