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Author: kltrader   |   Latest post: Thu, 20 Feb 2020, 9:38 AM

 

Mega First Corp. Bhd - Awaiting the Testing Phase

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Maintain BUY

Wet testing for Don Sahong is expected to begin in 3Q19 with the energy produced during the test phase to be sold to EDL at a discounted tariff rate. Potential upside to our FY19E earnings from the energy test sales. We also gather that the excess power produced by Don Sahong during its commercial operation phase will also be sold to Cambodia, alleviating concerns that EDL will be unable to monetize and make payment to Don Sahong. Our earnings and RNAV-based TP of MYR4.60 is unchanged.

Don Sahong to begin wet testing in 3Q19

The first of four turbines for Don Sahong has been installed. Wet testing is expected to begin sometime in 3Q19 over a period of a few months, with each turbine being fired up in phases. Over the wet testing period, we understand that energy produced will be sold to EDL at a discount to the tariff rates agreed under the concession agreement. Essentially, MFCB will see a one-off recognition of profits over the wet testing period which we have yet to impute into our FY19E earnings.

Addressing the lack of electricity demand in Laos

Electricite Du Laos (EDL) has signed a power purchase agreement (PPA) with Electricite Du Cambodge (EDC) to sell power to Cambodia. Majority of this energy we understand would come from Don Sahong due to its proximity to the Laos-Cambodia border and Stung Treng substation in Cambodia. We believe this would alleviate the concern that EDL would be unable to monetize the excess energy from Don Sahong. As for the scenario of EDL defaulting on payments, we believe it remains unlikely, as that would imply a sovereign default (since payments are guaranteed by the Laos Ministry of Finance) which could have wide spread implications to Laos’ other power investments and its overall economy.

Resources division’s outlook remain challenging

We do not foresee any significant recovery margins for Resources in FY19E as petcoke prices remain high (~USD110/MT) and the inability of MFCB to pass on the cost through higher prices. Demand from the steel sector also remains weak. Its 8th kiln has also been commissioned, raising its production capacity by 400MT/day to 1,960MT/day. Higher sales volumes could help buffer the earnings pressure from the low margins.

Source: Maybank Research - 10 Apr 2019

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