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Monday, December 15, 2014

Mega First Corporation - A Solid Diversified Company

Given its steady recurring income from the power business coupled with decent earnings prospects from its resources arm, we think that MFCB’s investors get both businesses for nearly free at its current share price today. Based on our SOP valuation, we see deep underlying value in the company. Further potential re-rating catalysts include i) stronger-than-expected production growth for the resources business, ii) renewal of concession for the power business in China and Sabah and iii) completion of its hydropowe r project in Laos by 2019, which will be the growth driver for the Group in the next couple of years. We think the company deserves better valuations based on its strong fundamentals, and reaffirm our Outperform call and target price of RM3.85 which implies a healthy potential upside of 60%.

Solid balance sheet with strong free cash flow. As at FY13, the Group has a total net cash & investment in quoted shares of RM178m or RM0.79/share with annual free cash flow per share of approximately RM0.32/share. Backed by the steady cash flow from the power business as well as the improved profitability of the resources segment, the company has been using the funds to do share buybacks, already owning 19.9m or 8.2% of total issued shares. It has been consistently paying dividends with a minimum of 7sen p.a. (25%-40% payout) in the last 5 years, which translates to a 3.1% dividend yield.

Potential mega returns from hydropower project in Laos. Our SOP valuation has not taken into account potential contributions from the 256 MW run-of-river hydropower project concession in Laos, which could potentially boost the RNAV contribution by at least RM1.00-2.00 per share upon completion. The RM1.5bn 256MW Don Sahong Hydropower project is expected to be completed by 2019.

Reiterate Outperform call. Based on our SOP-based TP of RM3.85, we see deep underlying value in the company. It is only trading at a forward PER of 8x. Despite the recent poor market sentiment across the small-cap sector, Mega First’s share price performance has been solid since our initiation. Further potential re-rating catalysts include i) stronger-than-expected production growth for the resources business, ii) renewal of concession for the power business in China and Sabah and iii) completion of its hydropower project in Laos by 2019, which will be the growth driver for the Group in the next couple of years.

Source: PublicInvest Research - 15 Dec 2014

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