We came away from Mega First’s (MFCB) post-results briefing last week with some mixed outlook on the company’s businesses. Despite voicing concerns over the market outlook for next year, the company does currently have a strong balance sheet to capitalize on new opportunities while on the lookout to expand its existing core businesses. The company’s share price is currently trading at an unwarranted P/E multiple of only 8x, significantly below the industry average of 20x. We maintain Outperform with an unchanged SOP based TP of RM4.75. Our earnings estimates are tweaked marginally to account for housekeeping changes. MFCB declared a higher DPS of 4sen for the quarter.

• Projecting higher EAF in 2H 2023. Management sees higher Equivalent Availability Factor (EAF) of above 92% for the 2H amid the wet season as water levels get significantly higher. Based on observations from the Mekong River Commission’s (MRC) Pakse substation, water levels are currently around 6-7m. According to the MRC, the region has received more than average in August alone, or about 40% higher than it was in 2021 and 2022 over the same period. Management also mentioned that it had recently submitted the draft concession agreement for 5th turbine to Electricite du Laos (EDL). The 65MW turbine will be used as a spare and will only run during the wet season, and scheduled maintenance periods. Hence, the projected EAF is only 41% upon commissioning. Management also explained the impact of El Nino was minimal as it only affected Don Sahong’s capacity during the usual dry period in the 1H.

• A busy year for solar segment. The Group has recently been awarded a 46.5MW solar farm project under the Corporate Green Power Programme (CGPP) and is expected to be commercially operational by end-2025. MFCB is still finalizing the terms with the corporate buyer, with the tariff a single buyer price from TNB. For now, they have secured an additional 68.7MW solar projects, namely, i) 10.8MW commercial & industrial solar projects, ii) 11.4MW solar farm project in the Republic of Maldives, and iii) 46.5MW solar farm project under CGPP. Following the recent announcement of Geely investing USD10bn to turn Tanjung Malim into ASEAN’s largest automotive hub, we believe MFCB stands a good chance given their established footprint in Proton’s current manufacturing plant.

• Cautious outlook for packaging. Construction of the two new factory buildings in Melaka (Hexachase) and Bangi (Stenta) remains on track for completion by year-end. Despite the full potential of doubling up revenues, management only plans to progressively add on capacity when the overall utilization hits 60%-70% as it sees a tougher outlook for 2024 in view of a slowdown in consumer spending.

• Improving the collaboration under IST. Amid a slowdown in semiconductor momentum, the 28.83%-owned Integrated Smart Technologies (IST), which is involved in automated test machine, is taking the opportunity to integrate three technology-based companies to collaborate on new products, design and new launches. The Group has invested a total of RM10m and it has been cash flow positive.

Source: PublicInvest Research - 29 Aug 2023