We recently had a meeting with Mega First?s management to follow up on the USD500m (RM2bn) Don Sahong hydropower project in Laos. It has been progressing well and management is confident that it will be completed before the deadline. We are now imputing the DCF-based value (WACC: 10%, IRR: 16%-17%) from the hydropower project into our SOP-based valuations, though with a 30% discount as we err on conservatism. Our TP is consequently bumped-up from RM 2.29 to RM3.16. Our Outperform call is maintained.

• Progressing well. The USD500m (RM2bn) Don Sahong hydropower project has been on track, reaching 10% completion as of Aug 2016. About RM290m has been invested for the excavation and foundation works. The next stage will be the installation of a powerhouse and turbines, before the commissioning and testing in 2019. The deadline to complete the project is 31 Dec 2019 while commercial operation is scheduled to take place in early 2020.
• Share price will gradually reflect progress of the Don Sahong project. We believe MFCB's share price would move in tandem with the progress of the Don Sahong hydropower project, which will be the key growth driver over the next 3 years. Apart from expecting a more than 3-fold jump in earnings, it will also help ease the concerns of losing the coal-fired power concession in China by 2022, which currently contributes more than 70% to Group revenue.
• Expanding limestone capacity further. The limestone business is currently undergoing its phase 2 capacity expansion, which will ramp up its total capacity from 1,160mt/day to 1,460mt/day by 1QFY17. It currently runs at a utilization rate of 77% every month. Management foresees a more competitive environment but believes the better cost advantage in terms of geographical location that it has would make itself stand out in the local market.
• Laos hydropower project could fetch as much as RM4.43/share. Upon the full commercial operation of the hydropower plant, we forecast that the Don Sahong Hydropower could contribute as much as RM4.43/share (WACC: 7%) based on our DCF valuation. As of now, we apply a higher WACC of 10% coupled with a 30% discount for the risk exposure during the construction period, which yields a valuation of RM2.26/share. All-in, our SOP-based TP is revised upwards from RM2.29 toRM3.16.

Source: PublicInvest Research - 17 Oct 2016