Ranhill may have a bullish breakout

Ranhill, which had completed its takeover of Ranhill Utilities in October last year, has recently broken above its medium-term downtrend line (see the weekly chart, Chart 1 below). On closer study of the daily chart (Chart 2), we can see that Ranhill's bottoming & reversal follows the pattern known as three-fan lines. The share price is now pushing against the third fan line at the RM0.85-87 level. A breakout above this level could lead to a strong rally in the share price. First target: RM1.00. Second target: RM1.20.


Chart 1: Ranhill's weekly chart as at Jan 22, 2009 (source: Quickcharts)


Chart 2: Ranhill's daily chart as at Jan 22, 2009 (source: Quickcharts)

(As at 10.14 am, the share price is at RM0.87. More to come on this post)

I believe the main reason for the steady recovery in Ranhill's share price is the value derived from the complete ownership of Ranhill Utilities. Firstly, there is a renewed sense of urgency to restructure the water industry in Malaysia. I must admit that I am not very familiar with this issue, which is perpetually in a state of flux. I remember vaguely that the proposal to nationalize the various states' water concessions, excludes the Johor state (which appears illogical, correct me if I'm wrong).

Whatever it is, the fact that Ranhill had proceeded to privatize Ranhill Utilities last year could mean that the management of Ranhill had come to the conclusion that Ranhill Utilities would enhance the value of Ranhill. If Ranhill Utilities were to be nationalized, Ranhill expects to be well compensated. Ranhill acquired the remaining shares of Ranhill Utilities which it did not own (about 29.6% or 87.2 million shares) at RM3.50 per share. In a very simplistic term, Ranhill expended RM305 million to acquire the remaining shares of Ranhill Utilities which it did not own and these additional shares would likely to contribute RM67 million to its bottom-line (i.e. 29.6% of annualized net profit of RM226.7 million for FY2008 as per its 3Q2008 results). The acquisition was priced at only 4.5 times its FY2008 earning!

Secondly, Ranhill will be announcing its results for 2Q2009 ended 31/12/2008 in the 3rd or 4th week of February. This set of results should reflect the positive contribution from the privatization of Ranhill Utilities, which was completed in early October 2008. Assuming an additional contribution of RM17 million from Ranhill Utilities, we would arrive at a net profit of RM20 million for 2Q2009 ended 31/12/2008 (i.e. adding RM17 million to the net profit of RM3.0 million for 1Q2009 ended 30/9/2008). This means that Ranhill's EPS would be about 3.4 sen for 2Q2009 ended 31/12/2008 and, going forward, its full year's EPS would be about 13.2 sen. Based on yesterday's closing price of RM0.82, Ranhill is trading at a PE of 6.2 times. While this is nothing to shout about (in this bad time), Ranhill's share price may deserve some re-rating. Whether it has been fully priced in, is another matter.

Ranhill did a massive kitchen-sinking exercise in 4Q2008 when it wrote off the amount receivable of RM556 million from the Melut Basin project in Sudan as well as recognizing losses totaling RM48 million incurred in Oil & Gas sector. This led to a net loss of RM719 million reported in that quarter.