Analysis of MEGA FIRST CORPORATION: Focus on RE

Mega First Corporation Berhad (MFCB) is advancing its core renewable energy (RE) segment through a new 25-year Power Purchase Agreement for the Don Sahong Hydropower Plant, expected to generate RM300 million in annual free cash flow. The company is also expanding into sustainable packaging, oleochemicals, agriculture, and plantation businesses, with a focus on achieving net-zero emissions by 2050. MFCB’s strong fundamentals, including a 7% free cash flow yield and stable profits, support a BUY recommendation with a target price of RM5.00. Key growth areas include renewable energy, oleochemicals, domestic cultivation, and its venture into the medical industry.

1. Strong Growth in Renewable Energy (RE) Segment

• MFCB is finalizing a new 25-year Power Purchase Agreement (PPA) for the Don Sahong Hydropower Plant (DSHP) in Laos.
• The addition of a fifth turbine is expected to raise the plant’s Effective Availability Factor (EAF) to 80%.
• This development could contribute an average of RM400 million in pre-tax profit annually, translating to RM300 million in free cash flow to equity for the RE segment.

2. Sustainable Free Cash Flow and Dividend Yield

• MFCB has historically maintained a 7% Free Cash Flow (FCF) yield.
• Dividend payout ratios are forecasted at 22%-27%, resulting in forward yields between 2.2%-2.6% for FY24 to FY26.
• Pre-tax profit is projected to be stable at around RM450 million, supported by the RE segment, solar portfolio, and resource segment with improving margins.

3. Turnaround in the Oleochemicals Business

• MFCB’s 50% stake in Edenor Technologies (previously acquired from Sime Darby) is poised for a turnaround.
• Current losses due to outdated machinery are expected to end by FY24, with profits anticipated by 2025 and 2026 (RM21.6m and RM33.6m respectively).

4. Environmental, Social, and Governance (ESG) Initiatives

• MFCB has committed to achieving net-zero emissions by 2050.
• The DSHP alone reduces CO2 emissions by 1.2 million tonnes annually.
• MFCB’s packaging segment has adopted 90% biodegradable materials, solvent-free plastics, and toluene-free printing inks.
• The company aims to add 15-20MW of solar capacity annually to align with Malaysia’s clean energy goals.

5. Entry into Domestic Cultivation Business

• MFCB has acquired a 64% stake in CSCAH, a company involved in the cultivation and distribution of produce.
• The acquisition includes 1,100 acres of farmland in Johor and Pahang, with plans to expand greenhouse farming.
• This venture is expected to contribute RM5.7 million and RM6.6 million in PBT by FY25 and FY26, respectively.

6. Expansion of Plantation Business in Cambodia

• MFCB holds a 50-year concession for 6,428 hectares of plantation land in Cambodia, with 2,560 hectares currently planted.
• Coconut and macadamia crops are expected to bring in RM200-300 million annually once commercial levels are reached.

7. Venturing into the Medical Industry

• MFCB is preparing to acquire hospital land in Setia Alam for RM43.7 million, with plans to build a 120-130 bed facility.
• Phase 1 is expected to open in 2029, with future expansion to 500 beds. This venture is expected to drive re-rating upon further details.

8. Valuation and Market Position

• A BUY recommendation with a target price (TP) of RM5.00 based on Sum-of-Parts (SOP) valuation.
• MFCB’s market leadership in the quicklime market with a 40% share in Malaysia adds to its strong positioning.
• MFCB’s commitment to ESG and renewable energy strengthens its appeal in the sustainable investment space.

9. Solid Fundamentals and Expansion Plans

• MFCB consistently delivers a core margin of 30% and generates RM250 million in free cash flow to equity annually.
• Expansion into oleochemicals, plantation, and distribution aims to boost the group’s long-term growth trajectory, with ROE targets of 10%.

This comprehensive strategy, centered on sustainability and diversification, positions MFCB as a key player for future growth in renewable energy and eco-friendly investments.