KUALA LUMPUR (June 8): Mega First Corp Bhd’s exploration of opportunities in renewable energy projects could be a re-rating catalyst for the group, according to Public Investment Bank Bhd (Public IB).

With Mega First expected to remain resilient in 2023 on the back of a solid balance sheet and steady cash flows from the renewable energy business, the research firm maintained an “outperform” call on the stock, with an unchanged target price (TP) of RM4.75.

In regard to Mega First’s Don Sahong Hydropower Project in Laos, Public IB analyst Chong Hoe Leong said there was a drastic drop in water level amid an unprecedented heat wave, which could have resulted in a lower usage in the energy availability factor for the second quarter.

“The water level at the Pakse substation dropped to its present level of 1.4m (metres), which is considerably lower than the 4.77m of 2022, and the long-term average of 2.73m,” he wrote in a note published on Thursday (June 8).

“On the positive side, it has received 1% hydro tariff adjustment to 6.34 US cents until the tenth year, before seeing a drop to 5.7-5.8 US cents for the eleventh to twentieth years, and followed by a 1% hike till the end of the concession,” Chong added.

He said the strengthening of the US dollar is also expected to help offset the impact of lower hydropower generation.

Under Mega First’s renewable energy division, the company also undertook solar photovoltaic investments in commercial and industrial rooftop solar projects in Malaysia.

On March 20, Mega First incorporated an indirect 99%-owned subsidiary Mega First Solar (Maldives) Consortium Pvt Ltd to install solar photovoltaic systems under a design, build, finance, own, operate and transfer basis.

As for Mega First’s resources division involved in the quarrying of limestone and the manufacturing of lime products, Chong highlighted that the robust lithium, nickel and copper mining activities in Indonesia, spurred by the electric vehicle boom, has created a strong demand for limestone.

Mega First has also said, in its financial report for the first quarter ended March 31, 2023 (1QFY2023), that it expects its 2023 earnings from its resources division to be better than that of 2022.

Besides that, Chong said Mega First is conserving capital to prepare for new opportunities.

“As of 1QFY2023, net gearing ratio remains low at only 3.4%, with a net debt of RM111 million. The outstanding loan for the hydropower plant currently stands at US$87 million (RM400 million), with an interest rate of 5.21%.

“It had spent RM33.3 million for capital expenditure, RM7.7 million for strategic investment, and RM11 million for financing costs,” Chong said.

At the time of writing, shares of Mega First traded a sen or 0.31% lower to RM3.17 per piece, valuing the group at RM3.13 billion. The counter has dropped 12.42% over the past year from RM3.62, with share price peaking at RM3.66 on Feb 14.

Based on Bloomberg, other research firms covering Mega First also recommended a “buy” or “outperform” on the stock, namely Maybank Investment Banking Group (TP: RM4.30), KAF Equities Sdn Bhd (TP: RM4.40) and Macquarie (TP: RM4).