This article first appeared in The Edge Financial Daily on January 15, 2019

Mega First Corp Bhd
(Jan 14, RM3.43)
Maintain outperform with an unchanged target price of RM4.74 per share: We recently had a meeting with Mega First Corp Bhd’s management and came away with some positive developments. The Laos hydropower project is in the final stage of completion and we expect to 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.

Construction of the Don Sahong hydropower project had reached nearly 80% as of December 2018. According to the engineering test, the turbines are expected to generate water flow at a rate of 600 cu m per second with an average utilisation rate of nearly 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, and these will generate more water flow into the channels heading towards the Don Sahong hydropower’s turbines, which are located at the southern tip of Laos. Technically, it will help increase the water flow and potentially increase the utilisation rate especially during the dry season, which is expected to see a low utilisation 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’ finance ministry. It is worth noting that the company will see a one-off lucrative gain (not included in our financial year 2019 earnings forecasts) during a six-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 RM400 million to RM450 million and a profit of RM200 million to RM260 million during the 25 years of concession.

The limestone business will continue to be under margin pressure due to heightening cost pressure (70% of operating cost is fixed cost), inability to pass on to consumers, weakening US dollar and weaker demand, especially in the steel sector, due to slower pace in regional economic activities . Nevertheless, the increased production capacity by 400 tonnes per day to 1,960 tonnes per day following the recent completion of kiln 8 in Gopeng, will help buffer the earnings pressure by lifting sales volumes. — PublicInvest Research, Jan 14