Investment Highlights

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

• Although MFCB’s results were below our forecast, we remain positive on the stock as group’s earnings are expected to improve in FY24F. Don Sahong Hydropower Plant (DSHP) is expected to benefit from a tariff hike in October 2023 and the completion of the 5th turbine in 3QFY24.

• MFCB has declared an interim gross DPS of 4 sen (2QFY22: 3.6 sen). We forecast an FY23E gross DPS of 7 sen, which implies a yield of 2.1%.

• Annualised, MFCB’s 1HFY23 net profit was 7% below our estimate and 12% below consensus. The group’s results fell short of our expectations due to higher-than-estimated interest expenses and losses in Edenor Technology, which is an oleochemical joint venture. We have reduced MFCB’s FY23E net profit by 9% to account for this.

• MFCB’s net profit fell by 12.6% YoY to RM159.2mil in 1HFY23, dragged by a tax provision of RM11.4mil and tax penalty of RM14.9mil. Also, MFCB’s share of net profit in Edenor swung from RM9.5mil in 1HFY22 to a loss of RM5.7mil in 1HFY23 as the plant was shut down for major maintenance and upgrading works.

• RE division’s EBIT rose by 4% YoY to RM206mil in 1HFY23, underpinned by a stronger USD and 1% hike in tariff in October 2022. The currency factor compensated for a lower EAF at DSHP as water levels fell due to the dry season. DSHP’s EAF dropped to 85.3% in 1HFY23 from 91.4% in 1HFY22.

• Resources EBIT expanded by 26.9% YoY to RM12mil in 1HFY23, supported by higher sales and currency gains. About two-thirds of sales come from overseas countries while local customers make up the balance 33%. EBIT margin inched up to 11.1% in 1HFY23 from 9.9% in 1HFY22.

• On the flip side, packaging EBIT slid by 8.3% to RM19mil in 1HFY23 from RM20.8mil in 1HFY22 due to weak demand. EBIT margin slipped to 9.3% in 1HFY23 from 10.6% in 1HFY22 as costs of wages and energy increased.

• MFCB is currently trading at an attractive FY24F PE of 8x, which is lower than the 5-year average of 10x.

Source: AmInvest Research - 25 Aug 2023