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MFCB

A LOW PROFILE, PROFITABLE ENERGY + PACKAGING BEAST

HIGHLIGHTS
 

• HYDROPOWER PLANT COMMENCED OPERATION, STRONG EARNINGS VISIBILITY CONTRIBUTION BY THE LAOS GOVERNMENT THROUGHOUT THE NEXT 25 YEARS

• WHY HYDROPOWER PLANT? STRATEGIC LOCATION, ONE-OFF CONSTUCTION, PERPETUAL FREE ENERGY SOURCE

• OVERCOMING CHALLENGES WITH NEAR-PERFECT EXECUTION

• SALES OF LIME PRODUCTS RECOVERED TO PRE-PANDEMIC LEVELS, NEW CUSTOMER, EXPECTED TO IMPROVE FURTHER

• SKYROCKETTING PACKAGING & LABELLING DEMAND, 100-200% CAPACITY EXPANSION IN PROGRESS

• LOW RISKS OF PACKAGING & LABELLING OVERSUPPLY AS WELL AS EXPANSION COST OVERRUN

• SHARE PRICES OF PLASTIC & PACKAGING COMPANIES HAVE SURGED, MFCB’S IS STILL LAGGING

• OTHER PROSPECTS: LSS4 & OTHER SOLAR PROJECTS WITH POTENTIAL RECURRING INCOME STREAMS

HYDROPOWER PLANT COMMENCED OPERATION, STRONG EARNINGS VISIBILITY CONTRIBUTION BY THE LAOS GOVERNMENT THROUGHOUT THE NEXT 25 YEARS

After 15 years of hard work, MFCB’s hydropower plant, Don Sahong has finally commenced full operation on 7 January 2020 in Laos. Located along the Mekong River in southern Laos, MFCB’s hydropower plant uses perpetually free-flowing water to generate electricity for Laos and also Cambodia.

MFCB has started selling the generated the energy to Electricite du Laos (EDL), the state corporation of Laos that runs and operates the country’s electricity generation. Annually, this translates into an annual revenue of around RM480 million and an annual profit of RM240-280 million for MFCB throughout a 25-year concession period, contributed by the Laos government.

Source: The Edge

An assumed average annual profit of RM260 million is equivalent to an annual EPS of 52.6 sen. This 52.6 sen EPS has not yet included the earnings generated from the lime products, as well as packaging and labelling products.

WHY HYDROPOWER PLANT? STRATEGIC LOCATION, ONE-OFF CONSTUCTION, PERPETUAL FREE ENERGY SOURCE

Hydropower is the cheapest way to generate electricity today. No other energy source, renewable or non-renewable, can match it. Once a dam has been built and the equipment installed, the energy source, flowing water, is perpetually free. This means that MFCO incurs no raw material costs in generating energy throughout its 25-year concession period (no coal or petroleum is required).

Another reason is that hydropower plants consist of sturdy mega structures and simple equipment, resulting in significant lower maintenance costs. This allows MFCB to create strong earnings and cashflows to the shareholders over the 25-year concession period, at a strategic location along the Mekong River with ample water flow for electricity generation.

OVERCOMING CHALLENGES WITH NEAR-PERFECT EXECUTION

MFCB’s management team takes a prudent and calculated approach in all their projects. The procedure for licensing a hydropower plant is a lengthy and expensive process. Many environmental impact studies must be undertaken. Covering from feasibility studies, compliance with all regulatory and environmental requirements, financing, construction and management, the entire hydropower plant project was completed on time with no cost overruns.

SALES OF LIME PRODUCTS RECOVERED TO PRE-PANDEMIC LEVELS, NEW CUSTOMER, EXPECTED TO IMPROVE FURTHER

According to MFCB’s latest quarterly report, demand for their lime products has gradually recovered from its trough in April-May. Overall sales volume of lime products by the Resource Division has recovered to pre-pandemic levels in June 2020, in part due to orders from a newly secured customer. MFCB expects this segment to deliver improving earnings throughout the second half of the year.

Source: MFCB’s Q2 Quarterly Report

Lime products include calcium oxide (quicklime), calcium hydroxide (hydrated lime), ground calcium carbonate (limestone), precipitated calcium carbonate (PCC) and others. They are used across a diverse range of applications, serving as an essential building block in most industrial processes.

SKYROCKETTING PACKAGING & LABELLING DEMAND, 100-200% CAPACITY EXPANSION IN PROGRESS

What many don’t notice is that MFCB also has packaging and labelling business. Due to COVID-19 and the New Normal, MFCB’s packaging and labelling business has achieved strong growth momentum in the first half of the year. This is mainly driven by continuing strong overseas demand for our flexible packaging products and paper bags.

MFCB’s packaging products are more environmentally-friendly and sustainable compared to other packaging products. This offers tremendous growth opportunities, as consumers become increasingly more conscious of the importance of sustainability.

MFCB management expects the packaging and labelling businesses to experience sustained demand throughout the entire 2020. To cope with growing domestic and overseas demand, MFCB has embarked on a major expansion programme to increase the production capacities of paper bags and flexible packaging by a whopping 200% and 100%.

MFCB is ready to invest RM80 for the expansion, including the construction costs of 2 new factories, over the next 2 years.

Source: MFCB’s Q2 Quarterly Report

LOW RISKS OF PACKAGING & LABELLING OVERSUPPLY AS WELL AS EXPANSION COST OVERRUN

Investors may be concerned about the risks of packaging and labelling oversupply and expansion cost overrun. We believe such risks exist, but the risks are low because the packaging and labelling demand has experienced a structure step-up in the New Normal, where people purchase more takeaway products, with heightened environmental consciousness.

MFCB’s management team takes a prudent and calculated approach in all their projects. Over a period of 16 years, their entire hydropower plant project was completed on time with no cost overruns. With time-tested, results-proven execution, we believe MFCB is able to produce the best returns on their packaging & labelling business expansion to their shareholders.

SHARE PRICES OF PLASTIC & PACKAGING COMPANIES HAVE SURGED, MFCB’S IS STILL LAGGING

Underpinned by strong demand growth and strong financial results, the plastic packaging theme has been strong. For examples, share prices of SCGM and TGUAN have been on strong uptrends in the past few months.

On the other hand, despite sustained high packaging and labelling demand as well as aggressive capacity expansions of 100-200%, share price of MFCB had been just consolidating in the past 5 months. A few small rallies do not really reflect their plastic packaging prospects.

We believe MFCB has been a lagging stock among its packaging pseudo-peers because the market has neglected the fact that MFCB is also a packaging player.

OTHER PROSPECTS: LSS4 & OTHER SOLAR PROJECTS WITH POTENTIAL RECURRING INCOME STREAMS

Source: MFCB’s Q2 Quarterly Report

CONCLUSION

(1) SOLID HYDROPOWER PLANT prospects

(2) STRONGLY GROWING packaging and labelling businesses, and

(3) POTENTIAL RECURRING INCOME from solar energy business

(4) Normal resource division performance

DISCLAIMER

This article is produced based on our own study and analysis based on publicly available information, for sharing purpose only. Our views could be impartial and/or inaccurate. There is no buy/sell recommendation.