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Monday, January 14, 2019

Mega First Corporation - In The Final Lap

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We recently had a meeting with Mega First’s (MFCB) management and came away with some positive developments. The Laos hydropower project is in the final stage of completion and we will see the first turbine installation in March followed by the energy test in June-July. The resources segment will continue to see margin pressures however due to a slowdown in economic activities and a weakening US Dollar. Interestingly, management has set its sights on the renewable energy business in Malaysia as the next venture after successful operation of the Don Sahong hydropower plant. Maintain Outperform call with an unchanged TP of RM4.74.
  • Laos hydropower project on the right track. Construction of the Don Sahong hydropower project has reached 79%-80% as of Dec-2018. We expect to see the 1st turbine installation in March 2019 followed by the energy test in June-July. According to the engineering test, the turbines are expected to generate water flows at a rate of 600 cu meter/second with an average utilization rate of 89%-90%, which is one of the highest levels in the world. We understand that as there are more new hydropower stations emerging along the Mekong river, it will generate more water flow into the channels heading towards the Don Sahong hydropower’s turbines, which are located at the southern end of Laos. Technically, it will help increase the water flow and potentially increase the utilization rate especially during the dry season, which is expected to see a low utilization rate of 77% for now. Meanwhile, the government’s transmission line measuring 120km from the Electricite du Laos Ban Hat substation to Don Sahong’s Ban Hut substation is currently on track for both parties (about 40% completed). Upon commercial operation, the four turbines are expected to generate an annual electricity production of 1,825GWh or 5,000MW/day and will be sold to Electricite Du Laos (EDL) for domestic consumption while excess electricity supplies will be sold to Cambodia. EDL will pay Don Sahong according to the energy availability and the payments are guaranteed by the Laos Ministry of Finance. It is worth noting that the company will see a one off lucrative gain (not included in our FY19 earnings forecasts) during the 6- month energy testing period as energy generated will be sold directly to EDL. Based on our earnings estimates, the hydropower project will contribute annual sales of RM400m-RM450m and profit of RM200m-260m during the 25 years of concession.
  • Challenging outlook in resources arm. The limestone business will continue to be under margin pressure due to i) heightening cost pressure (70% of operating cost is fixed cost), ii) inability to pass on to consumers, iii) weakening US dollar and iv) weaker demand, especially in the steel sector, due to slower pace in regional economic activities . Nevertheless, the increased production capacity by 400mt/day to 1,960mt/day following the recent completion of kiln 8 in Gopeng, will help buffer the earnings pressure by lifting sales volumes.
Source: PublicInvest Research - 14 Jan 2019

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