Mega First Corp (MFCB) announced yesterday that it is raising its shareholding in the 260MW Don Sahong hydropower project in Laos from 80% currently to 91.25% for a total consideration of USD85m (RM396.9m). Based on our rough calculation, the 11.25% increase in stake would likely contribute an additional 6% to our FY24-25F core earnings forecasts. We view this proposed acquisition as a good deal as it is earnings accretive. Meanwhile, the upcoming 3QFY23 results are scheduled to be released on 29 Nov. Maintain Outperform call with a new SOP-based TP of RM5.28 after raising our valuation for the renewable energy segment.

• Salient details about the proposed acquisition. Under the agreement with EDL-Generation Public Company, MFCB’s 56.25%-owned subsidiary, Mega Ventures will acquire the remaining 20% stake in Don Sahong Power Company for a total consideration of USD85m (RM396.9m). Upon completion of the proposed acquisition, MFCB’s effective stake in Don Sahong Hydropower project will be increased from 80% to 91.25%. The proposed acquisition is not subject to the approval of any regulatory authority and/or shareholders and is expected to complete by end-2023.

• Healthy balance sheet to undertake the exercise. The purchase consideration will be funded via a combination of bank borrowings, internal cash flows and cash at bank. Financially, the proposed acquisition should not be an issue for MFCB in view of its low net gearing position of 0.02x with a strong cash holding of RM596.6m, coupled with strong annual operating cash flows of RM500m.

• Earnings accretive deal. Based on the estimated funding cost of 4.5% in Malaysia and lower minority interest, the additional 11.25% stake would likely see earnings accretion to the Group starting from FY24F.

• Raising our earnings forecasts for FY24-25F. We raise our earnings forecasts for FY24-25F by about 6% to reflect the additional core earnings contribution from the Don Sahong Hydropower project.

• Market is under-appreciating the hydropower valuation. Based on our back-of-the-envelope calculation, the proposed acquisition price tag of USD85m (RM396.9m) for the additional 11.25% stake values the entire hydropower project at RM3.5bn, which is even higher than the current market capitalization of the company. Therefore, investors who buy the shares at current prices are getting the i) resources, ii) packaging and iii) oleochemical businesses for free.

Source: PublicInvest Research - 22 Nov 2023