• Mega First Corporation (MFCB) has proposed to raise its effective stake in the Don Sahong Hydropower Plant (DSHP) in Laos from 80% to 91.3% for US$85mil (RM395.3mil). DSHP generates more than 80% of MFCB’s earnings.

• MFCB via its 56.3%-owned subsidiary will buy the additional shares in DSHP from EDLGeneration Public Company, which is listed on the Laos Securities Exchange.

• The proposed acquisition will be completed by 31 December 2023.

• We view the proposed acquisition positively as MFCB will be able to enjoy higher earnings contribution from DSHP and increase its exposure to renewable energy.

• We estimate that MFCB’s FY24F net profit will improve by 5% due to the drop in minority interest in DSHP. The fall in minority interest will more than compensate for the loss of interest income from the cash used to acquire the additional stake in DSHP.

• Based on the acquisition cost of US$85mil, we estimate that MFCB is buying the additional stake in DSHP at a FY24F PE of 7x. We believe that this is fair.

• The acquisition cost values the entire stake in DSHP at US$756mil (RM3.5bil). In comparison, DSHP’s construction cost was RM2bil. DSHP commenced operations in FY20. DSHP’s 5th turbine is on track for completion in 3QFY24. This would raise DSHP’s capacity to 325MW from 260MW.

• We maintain BUY on MFCB with a fair value of RM4.45/share, which is based on FY24F PE of 10x. This is the simple average PE of the power companies in our coverage. MFCB is currently trading at FY24F PE of 8x, which is below its 5-year average of 10x.

Source: AmInvest Research - 22 Nov 2023