Excluding i) income tax penalties (RM14.9m) ii) gain on foreign exchange (RM14.3m), iii) gain on disposal of a subsidiary (RM1m) and iv) fair value loss on put option liability (RM2m), Mega First reported core earnings of RM188m (YoY: +9%) for 1HFY23, accounting for 47% and 48% of our and consensus full-year expectations, respectively. The steady results were mainly underpinned by the renewable energy and resources segments despite a decline in packaging earnings. Equivalent availability factor (EAF) for the Don Sahong hydropower plant registered a 6.1% decline from 91.4% to 85.3% in 1HFY23 due to the scheduled turbine maintenance in 1Q23 and sub-normal dry season in 2Q23. Management expects the average EAF for 2023 to moderate from 94.6% to 91%. Maintain Outperform call with an unchanged SOP-based TP of RM4.75. The current share price significantly undervalues MFCB based on current PER valuations of only 7-8x.

• 2QFY23 revenue (QoQ: -6%, YoY: -2%). The Group’s revenue slipped 2% YoY to RM326m, mainly dragged by weaker renewable energy sales while packaging sales were marginally lower. The decline in renewable energy sales were caused by a 9.5% drop in hydro energy sales volume, partially offset by i) a 4.1% currency gain, ii) 1% hydro tariff adjustment and iii) a 43.5% jump in solar energy sales to RM2.1m on higher installed commercial and industry solar capacity at 20.5MW (vs 2QFY22: 14.5MW).
  Meanwhile, resources segment registered sales growth of 4.9% YoY to RM52.4m, led by a 4.5% increase in sales of lime products to RM48m and a 9.1% growth in non-lime product sales as export currency gain more than offset a slight decline in sales volume.
  Packaging sales remained at RM100.4m, supported by sales of both flexible packaging and paper bag products.

• Core earnings grew 7% YoY. Excluding the exceptional items, the Group’s core earnings rose 7.3% YoY to RM100.5m, led by resources (+53%) despite weaker results from the renewable energy (-2.4%) and packaging (-13%) segments. Renewable energy earnings fell to RM105.5m as Don Sahong experienced sub-normal dry season during the quarter, resulting in lower EAF of 88.7% (vs 2QFYFY22: 98%). Despite flattish sales growth, packaging segment earnings contribution softened to RM8.1m due to stiffer price competition.

• Oleochemical swung into losses. The jointly-owned Edenor swung from a pre-tax profit of RM5m in 2QFY22 to a pre-tax loss of RM5m as the three major plants suffered a significant capacity loss during the period due to major annual maintenance cum extensive upgrading works amidst a soft demand.

Source: PublicInvest Research - 25 Aug 2023