Mega First's 95%-owned Don Sahong Power Company has finally concluded the Supplemental Concession Agreement (CA) with the Laos government and a Supplemental Power Purchase Agreement (PPA) with Electricite Du Laos (EDL) on several key changes following the addition of a new 65MW turbine at a project cost of USD78m. Overall, there are two key positive surprises, namely, lower-than-expected royalty payments and corporate tax. We opine that the new 25-year PPA and CA are value accretive to the company. We raise our FY25-26F earnings forecasts by 3%-15%. Consequently, our SOP-based TP is also revised up from RM5.36 to RM5.80 as we raise our valuations for the renewable energy segment. Maintain Outperform.

• Salient details of the new PPA and CA. To recap, there are two main factors that spin the idea of new PPA and CA, namely, the long outstanding receivables (>5 months), which represent the remaining 10% electricity tariff proceeds in local KIP currency from EDL and the inclusion of a new 65MW turbine generator. Under the new agreements, the concession period has been extended from 30 Sept 2045 to 31st Dec 2049, while the commercial operation date has been reset to 1st Jan 2025. Don Sahong Power Company has also agreed to front-load USD82.4m (RM367m) to secure the water river rights, which is significantly lower than our earlier estimate of USD100m (RM445m). Meanwhile, the corporate tax will be determined at an incremental of 5% starting from 2026 before rising to the standard rate of 24% in 2030. That is a significant saving, as we previously assumed a normalised corporate tax rate of 24% starting from 2026. Meanwhile, EDL is expected to purchase and pay for all energy availability on a take-or-pay basis during the dry season and purchase and pay for energy availability of up to 955GWh on a take-or-pay basis during the wet season. The tariff structure has been adjusted to 6 US cents before rising to 6.20 US cents in 2029 but the average remains at 6.15 US cents.
• Impact on our valuation model and earnings forecasts. The changes mainly involved 5 areas, namely, i) corporate tax, ii) amortisation charge of the hydropower asset, iii) royalty payment, iv) concession period, and v) EAF. Following the addition of new electricity capacity, the equivalent availability factor is estimated to drop from 95% to about 87%, while electricity sales are expected to increase from 2,028 GWh/year to 2,300 GWh/year, an increase of 13.4%. Under our new valuation model, there will be no recognition of annual royalty payment after it has agreed to pay a one-off upfront fee of USD82m, a significant saving compared to the cumulative payment of USD175m (USD7m x 25 years) throughout the concession period. In addition, the standard corporate tax is deferred to 2030 instead of 2026, which will see a potential annual tax saving of more than RM80m. Bottomline will be further improved by a lower annual amortisation charge, as the current hydropower asset, which has been amortised at about USD100m in the past, will be capitalised at a lengthened concession period. It is worth noting that our new earnings forecast also takes into account the overhaul of each turbine starting from next year at an expense of RM12m per turbine and it takes about 3 months.

Source: PublicInvest Research - 11 Dec 2024