Management remains optimistic over the company’s earnings outlook despite encountering a few recent challenges, namely, i) rising interest rates, ii) rising operating cost environment, iii) supply chain inventory overhang and excess, and iv) soft consumer sentiment. After posting record earnings in FY22, we expect to see a slowdown in earnings growth this year in view of slight declines in the EAF for its renewable energy segment. Despite setting aside a massive RM466m for capital expenditure, we still expect to see gradual improvement in dividend payout. Maintain Outperform with an unchanged SOP-based TP of RM4.74.

• Projecting slight drop in 2023 EAF. The Don Sahong Hydropower plant is expected to see a lower Energy Availability Factor (EAF) by 2% to 92%-93% in 2023, due to deferment of annual turbine maintenance from Aug-Sept 2022 to Feb/Mar 2023, which takes about 11-13 days for each turbine. Currently, water level at the Pakse substation is low, at 1.38m considering the seasonal dry weather. Meanwhile, outstanding loan for the hydropower plant is currently at USD94m (RM421m) with interest rate at 5.21%. Assuming a stable exchange rate at RM4.40/USD, FY23 earnings forecast for the renewable energy segment is expected to be marginally lower on weaker EAF and higher interest expense, partially offset by the 1% tariff hike adjustment.
  
  Construction of the 5th turbine, which costs about USD70-75m (USD1.1- 1.2m/MW) is on track with targeted completion in 3Q 2024 (refer to Figure 2). In light of steep increase in global interest rates, the required internal rate of return (IRR) for the commercial and industrial rooftop solar projects has been revised from 8-9% to 10%. Demand for solar panel installation in Malaysia is robust given the steep electricity tariff hike this year while panel costs have dropped by more than 20% in the last 5 months.

• Raising average selling price (ASP) for lime products. Despite petcoke prices having recently stabilized, production cost is expected to remain under pressure given the sharp increase in electricity surcharges from 1st Jan 2023 onwards, as well as rising labour costs. To contain cost pressures, management has revised up its ASP for selling products from RM300-310/mt to RM410/mt.
• Steady outlook for Integrated Smart Technology. The 28.83%-owned stake in Melaka-based Integrated Smart Technology S/B, which is involved in automated test machine design and assembly for the semiconductor industry, contributed about RM2m to the Group’s bottomline in FY22. As of now, it has recruited almost 80 engineers. Despite the slowdown in the global semiconductor industry, it has received more enquires and expects to see a pick-up in orders in the 2H.
• Eyeing capacity expansion for Bloxwich. The Perak-based auto spare part supplier has seen increasing orderbook for its mechanical parts from local and regional automakers. MFCB has plans to put in capex of RM4-5m to set up a new plant to expand its tooling machinery capacity. As of FY22, the spare part supplier registered revenue of RM18m with net profit of RM3- 4m. It is expected to see a strong double-digit sales growth this year.

Source: PublicInvest Research - 20 Mar 2023