Investment Highlights

• We initiate coverage on Mega First Corporation (MFCB) with BUY call on a fair value of RM3.60/share, based on a FY24F PE of 8x, which is the 2-year average. We attach a 3- star ESG rating to MFCB.

• MFCB’s valuations are cheap. Based on Bloomberg consensus estimates, MFCB is trading at an undemanding FY24F PE of 7x vs. Malakoff’s 11x, YTL Power’s 9x and Gas Malaysia’s 13x. Tenaga Nasional’s FY24F PE is 11x.

• We are positive on MFCB for the following reasons:-

• MFCB has the highest exposure to RE (renewable energy) among the major utilities. More than 80% of the group’s EBIT are from the RE division, which comprise hydro and solar projects. MFCB does not have exposure to coal.

• MFCB is a net beneficiary of a strong USD. Earnings from the Don Sahong hydropower plant (DSHP) in Laos are recognised in USD. We estimate that the EBIT of the RE division would rise by 2% for every 10 US$ cents increase in the exchange rate.

• Backed by the group’s proven track record in hydro and solar activities, MFCB is well-positioned to benefit from Malaysia’s Energy Transition Roadmap, which will be announced in 2H2023. The roadmap outlines the government’s initiatives to reach a RE target of 70% by 2050F.

• MFCB’s net profit is expected to recover by 13% in FY24F after being affected by tax provisions and penalty in FY23E. EBIT of the RE division is envisaged to grow by 8% in FY24F underpinned by the commissioning of a 5th turbine at DSHP in 3QFY24 and annual tariff adjustment of 1% in October 2023. Upon completion, the 5th turbine would expand the capacity of DSHP to 325MW from 260MW currently.

• The resources division is anticipated to be a beneficiary of the mining boom for lithium, which is used to manufacture electric vehicles. The resources division produces lime, which is used to remove pollutants in mining industries. Exports account for two-thirds of the division’s sales while domestic sales make up the balance one-third. Resources accounted for 3.6% of MFCB’s EBIT in FY22.

• MFCB is currently trading at a FY24F PE of 7x, which is lower than the 5-year average of 10x.

Source: AmInvest Research - 12 Jul 2023