Mega First Corporation's subsidiary, Don Sahong Power Company has entered into a Supplemental Concession Agreement with the Laos Government and a Supplemental Power Purchase Agreement (PPA) with Electricite Du Laos to revise the terms following the commissioning of the new 65MW fifth turbine at the hydropower plant. Overall, we believe that the revised terms are earnings neutral as the fall in tariff in FY25F is expected to be compensated by lower depreciation and tax expenses. Also, Don Sahong Hydropower Plant's (DSHP) concession will expire on 31 December 2049 vs. 30 September 2045 originally. We maintain BUY with an unchanged target price of RM5.23/share. Our target price is based on a FY26F PE of 10x, which is the group's five-year average.

• Lower tariffs in the short-term but levelised tariff throughout the concession period remains the same. The levelised tariff throughout the concession period under the new PPA is unchanged at 6.15 US cents/kWh. Under the new PPA however, the tariff movements are evened out instead of rising and then falling sharply, which would have been the case under the previous PPA. Under the new PPA, DSHP's tariff is 6 US cents/kWh in FY25F before rising to 6.2 US cents in FY29F. Currently, DSHP's tariff is 6.4 US cents/kWh. Hence, DSHP's tariff would decline by 6.2% in FY25F.
• Lower tariff is compensated by a decline in depreciation expense in FY25F. Due to the extension of the concession period by four years and three months, we estimate that MFCB's depreciation expense will drop by 14% in FY25F. Under the new PPA, DSHP's concession period will end on 31 December 2049 compared to 30 September 2045 previously.
• DSHP's tax rate will remain low at 5% in FY26F before rising to 24% in FY30F. Under the previous PPA, DSHP's tax rate would have reverted to Laos' corporate tax rate of 20% to 30% in FY26F. Our previous forecast assumed that MFCB's effective tax rate would increase to 6% each in FY25F and FY26F from 3% in FY24F.
• Overall, MFCB's earnings remain relatively unchanged. Although DSHP's turnover is expected to fall due to the lower tariff in FY25F, this would be offset by the drop in depreciation and taxation expense. We view the new PPA positively as the concession period would be extended to FY49F. This would sustain MFCB's earnings in the long-term.

Source: AmInvest Research - 11 Dec 2024