Investment Highlights

• We maintain BUY on Mega First Corporation (MFCB) with a higher fair value of RM4.45/share vs. RM3.60/share previously. Our fair value is based on a FY24F PE of 10x, which is the average PE for the power sector. We also ascribe a neutral 3-star ESG rating to MFCB.

• Our FY24F PE assumption has been raised to 10x from 8x previously as we believe that MFCB should trade in line with its peers. This is due to the group’s high RE exposure and resilient earnings.

• MFCB’s earnings are expected to improve in 2HFY23 after being affected by a tax penalty and losses at Edenor Technology (oleochemical joint venture) in 1HFY23. We reckon that 2H would account for 55% of FY23F net profit while 1H would make up the balance 45%.

• Water levels at DSHP (Don Sahong Hydropower Plant) in Laos have recovered. Hence, we believe that the plant’s EAF (equivalent availability factor) would exceed 90% in 2HFY23 compared to 85.3% in 1HFY23. DSHP’s EAF is estimated at 91% in FY23E vs. 94.6% in FY22. The decline in EAF in FY23E is attributed to maintenance works and low water levels in 1Q.

• DSHP’s 5th turbine is on track for commissioning in 3QFY24. The equipment and parts of the turbine are anticipated to be shipped to Laos over the next few months. The 5th turbine would boost DSHP’s capacity to 325MW from 260MW in 3QFY24.

• We believe that Edenor’s losses would narrow in 2HFY23 in the absence of plant shutdowns. Due to operational issues, almost half of the plant’s capacity was affected in 2QFY23. Since then, the plant’s operations have stabilised. We forecast MFCB’s share of net loss in Edenor to be RM10mil in FY23E (FY22 share of net profit: RM17.1mil). We think that Edenor would break-even in FY24F.

• Earnings of the resources division are envisaged to be resilient in FY23E on the back of lower raw material costs and positive demand. This is expected to compensate for softer packaging profits.

• The packaging division is anticipated to be impacted by weak demand in FY23E. We forecast resources EBIT at RM25mil in FY23E while packaging EBIT at RM23mil.

• MFCB is currently trading at an attractive FY24F PE of 7.5x vs. the average power sector’s 10x.

Source: AmInvest Research - 12 Oct 2023