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This article first appeared in The Edge Financial Daily on February 13, 2018

Mega First Corp Bhd 
(Feb 12, RM3.53) 
Maintain outperform call with an unchanged target price of RM4.48.
We recently had a meeting with Mega First Corp Bhd (MFCB) management and came away with some positive updates. The company is looking at stronger construction progress in its Don Sahong hydropower project after reaching about 46.5% last year. On another more cheerful note, it also sees a downward revision in the total project cost which was earlier estimated at US$417 million (RM1.64 billion), thanks to the lower-than-expected expenditure in finance cost and transmission line, which would help lift construction profit margins this year onwards. 

The resources segment, which contributes the bulk of its cash flow before Don Sahong contributions kick in, expects to see export sales dominate this year as it penetrates new markets in the region. This could potentially offer higher sales orders than local buyers. Construction for its eighth kiln in Gopeng is currently underway and is expected to be completed by end of 2018. The new kiln will bump up the total capacity by 400 tonnes to 600 tonnes per day (mt/day) or 25% to 38% to 1,960 mt/day to 2,160 mt/day making it the biggest quicklime producer in Malaysia from 2019 onwards. 

Currently Belgium-based Lhoist Malaysia, which has a lime plant in Tapah, Perak, is the closest competitor with a total capacity of 1,600 mt/day to 1,700 mt/day. Upon completion, we expect to see an annual earnings growth of 10% to 15% over the next three years.

Deconsolidation cost to hit fourth quarter ended Dec 31, 2017 (4QFY17) results. Its 60%-owned Shaoxing power plant in China has terminated operations as the concession ended on Oct 22 2017. As a result, we gather MFCB is expected to incur a huge write-off in the upcoming 4QFY17 results, estimated to be around RM60 million due to the one-off provision for retrenchment of workers and reversal of translation gains over the cumulative years.

Tawau concession extension still hangs in the balance. The 51%-owned Serudong Power Plant in Tawau, which contributes profit of RM4 million to RM5 million per annum (pa) to MFCB, has also ceased operations since the expiry of the power purchase agreement on Dec 2, 2017. We understand that the energy, green technology and water ministry has given the green light for the extension deal (three years + two years of option). Nevertheless, it is still subject to the Sabah Electricity Board’s approval. Worst-case scenario, extension talks will be terminated and the power asset will be sold at a scrap value.

Don Sahong hydropower project is progressing well. About 46.5% has been achieved as of end 2017, with a target of close to 80% by the end of this year. Construction of the 30km transmission line will take place soon while the first turbine will be installed by 1QFY19. Construction profit margin is expected to be higher than the 26.5% it registered over the years as the finance cost and transmission line cost are lower than previously budgeted. Meanwhile, the Laos government’s 100km transmission contract has been awarded, with construction also to kick-start soon. — PublicInvest Research, Feb 12.

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