Yeow: The group will begin selling electricity generated within the testing period. Photo by Sam Fong/The Edge
AS construction of its maiden hydropower project in Laos nears completion, Mega First Corp Bhd is looking closer to home for options in the power sector, specifically in renewable energy.
“Currently, the source of renewable energy that we would consider exploring would be solar [energy],” its director Yeow See Yuen told The Edge in an interview during the recent Invest Malaysia 2019 conference hosted by Bursa Malaysia and Malayan Banking Bhd.
“We are interested to explore that (renewable energy projects in Malaysia). To participate, we would need to look at our capabilities, whether we meet all the conditions.”
That said, he acknowledged this venture is still at a preliminary stage as the Ministry of Energy, Science, Technology, Environment and Climate Change (MESTECC) had announced last week that it would put out tenders for renewable energy (RE) and energy efficiency (EE) contracts of at least RM3.2 billion this year.
Whether or not Mega First has a role to play in Malaysia’s growing RE space, it remains focused on Don Sahong, the group’s US$366 million 260mw run-of-river hydropower project located on the Mekong river in southern Laos. Run-of-river hydroelectricity is a type of hydroelectric generation plant where little to no water storage is given.
A cash cow in the making, Don Sahong was 79% completed as at December last year and is progressing as scheduled, with completion projected by year end “COD (commercial operation date) is expected to be by the end of this year, and we will start the dry test sometime in the second quarter, and the wet test will probably commence sometime in the third quarter this year.”
Once the COD is achieved, the hydropower plant will be able to sell the energy it generates to Electricite Du Laos (EDL), the state corporation that runs and operates Laos’s electricity generation.
Annually, this translates into a revenue of US$120 million (RM488.902 million) and a profit of US$60 million to US$70 million for Mega First during the project’s 25-year concession period starting from its financial year ending Dec 31, 2020.
However, the group will begin selling electricity generated within the testing period.
Initially, the Indochina media reported about environmental concerns stemming from the plant, but Yeow maintains its impact on the environment is minimal.
“We have addressed all the concerns of environmentalists, in particular on the impact to fisheries. We have actually installed an underwater camera to capture videos of the species of fishes and their size to ensure that we are helping the fish population to grow rather than shrink, and that is part of our environmental and social obligation to the Laos government.”
The investment community, on the other hand, has concerns over the ability of the Laotian government to make good on payment for power generated during the 25-year concession period.
“A lot of people are talking about payment risks ... Whether the government is able to pay. We are equally concerned, but we looked at it in a slightly different way,” said Yeow.
“The first thing is, will it have off-takers for the power that we generate? Under the PPA (power purchase agreement), legally it has to pay us for the energy that is made available, regardless of whether it uses it or not.
“From a commercial perspective, we also understand that if it cannot sell [the energy produced] to Laotians or their industries, then it could face cash-flow problems. However, the Laos government is fully aware that there could be excess power that it has committed to buy, so it has recently signed a memorandum of understanding and PPA with the Cambodian government to sell excess energy to Cambodia, and that should help solve the off-taker issue.”
Yeow believes a default by the Laotian government is unlikely due to its stated ambition to transform the country into the “battery of Southeast Asia” by banking on hydroelectric power projects.
“For the government to default ... it would have damaging consequences, not only for us but for every [hydropower] project there is in Laos, given that the country is developing itself as the battery of Southeast Asia, [and] selling power all the way to Vietnam, Myanmar, Thailand and Cambodia. It cannot afford to default.
“The existing foreign investors in the Laos power space include those from China, Japan, Norway and France, to name but a few, and [so far] there has not been any [payment] default by the Laos government.”
Apart from its power division, Mega First also has a resources division which is one of Malaysia’s largest quicklime producers. Quicklime — a chemical compound called calcium oxide — is a key ingredient in making cement.
“Three years ago, our [quicklime] capacity was only 760 tonnes per day. After adding three kilns in the last three years, with the most recent addition in January this year, we are now at eight kilns with a capacity of 1,960 tonnes per day.
“We have been growing our top line every year at a strong double-digit growth. However, although we saw healthy growth in volume last year, we faced some financial pressure from rising fuel prices on account of a hike in petcoke (petroleum coke) prices, coupled with higher packaging as well as transport and freight costs.
“We could not pass on these costs to our customers, so although our selling price has been stable, the unit production cost has gone up and that has squeezed our margins,” said Yeow.
For FY2018, the power division accounted for three-quarters of the group’s revenue while the resources division contributed 16%.
The group reported a 4.9% increase in revenue to RM874.12 million in FY2018. Net profit, however, fell 6.56% to RM129.27 million, partly due to a stronger ringgit against the US dollar.
Mega First shares reached an all-time high of RM3.99 on Feb 4. It closed at RM3.80 last Thursday, valuing the company at RM1.51 billion. Analysts covering the stock have “buy” and “outperform” calls on the counter, with target prices ranging from RM4.60 to RM4.74, indicating an upside of 21% to 25%.