Mega First Corporation - Getting Ready For Wet Test

Date: 29/07/2019

Source  :  PUBLIC BANK
Stock  :  MFCB       Price Target  :  5.04      |      Price Call  :  BUY
        Last Price  :  5.29      |      Upside/Downside  :  -0.25 (4.73%)

We came away from our meeting with Mega First (MFCB) last Friday with more positive updates on the progress of the Don Sahong Hydropower project in Laos, which has achieved more than 90% completion as at end-1H 2019. Energy sale test for the 1st turbine will commence by Sept 2019. With that, we are confident that the 260MW-Don Sahong Hydropower station is on track as per the commercial operation date on 1st Jan 2020. As construction progress slowly tapers off, we expect to see a declining trend in the recognition of construction profits from 2QFY19 onwards. Meanwhile, the resources segment is also slowing down due to softer demand in both export and domestic markets. Nevertheless, the drop in earnings would be cushioned by the one-off bumper gain from test energy sales, which have not reflected in our FY19 earnings forecasts yet. 2QFY19 results are scheduled to be released on 22 Aug 2019. We affirm our Outperform call with an unchanged TP of RM5.04.

  • Hydropower project heading toward completion after 4 years. As of end-June 2019, cumulative physical completion of Don Sahong has slightly exceeded 90%. The 2nd & 3rd turbines are undergoing dry test while installation of the 4th turbine is also underway. With opening of the upstream coffer dam in May 2019, the turbines will be headed for wet test this month. We also understand the 1st turbine has already fully possessed power generation conditions.
  • Selling energy to Cambodia. To recap, Electricite Du Cambodge (EDC) had signed a PPA with Electricite du Laos (EDL) in May 2019 to purchase up to 195MW (will consume about 200kV only) of power from Laos due to its proximity to the Laos-Cambodia border. Cambodia has been suffering from frequent power shortages over the years due to lack of power capacity expansion amid its continuous strong GDP growth (>7% p.a.). The existing 115kV transmission line from Ban Lat substation, Laos to Stung Treng, Cambodia is not able to cope as per the PPA demand however. To this end, construction of a new 500kV (which can cope up to 4,000 MW) transmission line of from Ban Lat substation to Stung Treng substation is in the progress. Our channel checks reveal that construction of the new transmission line from Laos-Cambodia border to Stung Treng substation (60km) has reached 25km or 41% completion. On its end and to make it in time for the Don Sahong Hydropower commencement, EDL has decided to solely focus on the transmission from Ban Hat substation to the Laos Cambodia border, which is about 22km. To further shorten the process, it also plans to loop a connection from the newly-completed Don Sahong Hydropower-Ban Hat line. The “looped” transmission line is about 10km and will probably take about 2-3 months for the construction. (refer to Figure 1)
  • Resources segment facing headwinds. The limestone business is being affected by weaker demand from the steel sector due to slowdown in construction activities amid stiffer competition. The company is in the midst of securing new customers to cushion these headwinds. Utilization rate currently stands at 60%-65%.
  • Eyeing 100MW in LSS3 projects. Management also guided that it plans to participate in the 500MW large scale solar 3 (LSS3) project in Malaysia by using its vacant land in Kinta, Perak. Deadline for submission is 19 Aug 2019.
  • Seeing downward revision in hydropower project cost. Total project cost under its 80%-owned project company, Don Sahong Power Company is estimated to be about USD401m while its group project cost is about USD366m. Given the softer interest rate environment, the group may stand to benefit weaker from lower finance cost from its USD150m borrowing, likely bringing down the overall project cost for its Don Sahong hydropower project. At the MFCB level, our analysis shows that a 25 bps cut in interest rates, it will see an interest saving of USD0.4m (RM1.7m), which could potentially bump up its EPS by 0.36sen.

Source: PublicInvest Research - 29 Jul 2019

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