Brokers Report: MEGA FIRST CORPORATION - Major Progress In Don Sahong Project

Reaffirm OUTPERFORM call with a higher target price (TP) of RM4.48

We remain bullish on Mega First (MFCB) as more construction profits are recognized from its 80%-owned 260MW Don Sahong Hydropower project in Laos this year. Progress is expected to nearly triple (up from 16.5% to 45%- 50%) while double-digit growth is also expected from the resources segment. We reaffirm our Outperform call with a higher TP of RM4.48 (up from RM3.16) after rolling over our valuations to FY18 while also lowering our discount attached to the Don Sahong Hydropower project in light of the lower exposure risks as the plant moves closer to completion.

• Targeting a bigger milestone this year. The USD500m (RM2.5bn) Don Sahong hydropower project is very much on track. As the time of writing, the completion rate has reached 23% and is expected to reach about 45%- 50% by year-end. About RM362m had already been invested for excavation and foundation works last year. The next stage will be the installation of a powerhouse and turbines, before commissioning and testing begins in 2019. Assuming everything goes well, it is expected to start production testing by 2H 2019. The hydropower business is expected to bump up from the current group earnings by more than 2-fold in 2020.

• Resources segment expected to see double-digit growth. After seeing an aggressive expansion over the last 2 years, we expect to see the resources segment starting to reap the benefits. It now has a total of 7 lime kilns with a combined capacity of 1,560mt/day (up from 1,160mt/day) following the completion of its phase 2 expansion last month. Based on our estimates, we are looking at a 20%-30% earnings growth for the next 2 years.

• Both concessions coming to the tail-end soon. We understand that the current power concessions in China and Tawau are going to expire by end- 2017. We think that it is not commercially viable for the management to seek extension for the China's concession due to tightening environmental controls which require new investments for further upgrades. In addition, heightening coal prices and inability to seek tariff hikes is likely to hinder the decision to seek extensions. Meanwhile, a proposal for an extension of the Tawau's power purchase agreement has been submitted for negotiations. Nevertheless, we think the financial impact for both concessions will be minimal as the loss of power-related earnings contributions will be mitigated by the construction profit recognized in Don Sahong Hydropower project.

• Lifting our TP in tandem with more significant progress. We raise our target price from RM3.16 to RM4.48 after rolling our valuations to FY18 while also reducing our discount (from 30% to 20%) attached to the Don Sahong project given the significant progress expected this year. In line with this, we expect to see strong earnings jumps this year on the back of stronger construction profit while resources should also deliver better results following the completion of its capacity expansion plans.

Source: PublicInvest Research - 27 April 2017