3069 Mega First Corporation Berhad (Undervalued)

The research note in Public Invest pretty much summarize what my current thought. Interesting readers can read it here. I just like to share my thought on the new project - Don Sahong Hydropower Project undertake by the company.

Few Key Notes:
1.  This is a hydro power plant with fairly reliable electricity output. Coupled with the fact that the PPA is of take or pay type. Revenue for the company will be fairly stable and predictable.

2. The actual selling price of the electricity per kwh is undisclosed. My guess will be $5c /kwh, based on the average unit cost in Laos in 2009. (source)

3. Once built up, the major component of the cost will be
a) yearly repayment to long term debt
b) Annual O&M cost, the most likely to go up. Estimate is about 2-2.5% of the total installation cost.
(Source)
c) Depreciation charge, assuming linear depreciation.
d) Corporate income tax, currently 24% in Laos.

The net cash flow to the company, will then be profit after tax + depreciation charge.

4. Financing Structure. MFCB average return on equity is about 10%, higher than the typical rate for long term corporate bond. Given the stable nature of its revenue stream, the best option is to finance large part of the project using short term and long term debt (USD bond if revenue is fixed in USD term). which can go up to 90% of the financing requirement.

Estimation Results:
I made a few set of assumptions on major factors that could affect the PV valuations, these factors include:
a) the total CAPEX of the project
b) Annual generated unit of electricty
c) Capacity degradation of the hydroplant, either due to change in river flow rate or aging of generator.
d) Unit price of electricity
e) Adjustment rate of electricty
f) Long term debt interest rate
g) Opex,

with assumptions and results as below picture.

I haven't run a sensitivity analysis yet but the bigger uncertainty will be on electricity unit sale price and loan interest rate. Nevertheless, based on the mid-case, it seems the current share price (RM 2.5) is a good bargain compared to the valuation you will get.

However, do be mindful that as one of its power plant PPA is expiring at end of 2017 (2018?), there will be period where Its profit & cashflow will dropped, before its picked up again.

Disclaimer
The data above was taken and calculated according to information supply from the company's announcement, quartery report and annual report available at the Bursa Saham website, there is some element of estimation in deriving the figure. 
The author bear no responsibilities of any buying/selling action of the investor, and any profit/loss incur by the investor.

The author had ownership in the stock covered.

My Investment Policy Statement (2nd Edition revised in 2015)

Things have change since i wrote my investment policy statement in 2014 (here).
The most notable one is that i had changed my job to one with a higher commendable salary, and save up a small amount of money. L

Few assumptions:

i. Malaysia Inflation Rate to be 2.5% per year. (last 10 years average, 2.38% see calculation here.)

ii. Salary to be rise at 5% per year. With average income per month = RM 10,000 (include base pay, allowance and bonus).

iii. required living expense per month to live comfortably = RM 2,000 in current ringgit. 

Additional insurance expense = RM 500. 

iv. Malaysia income tax rate unchanged. No introduction of capital gain tax and dividend from public company remain tax - exempted. 

v. EPF average return to be 5% per year. This is also the achievable return by my own portfolio. Current EPF saving = RM 60,000, current own saving = RM 200,000. 

vi. Risk Free rate = 3.25%, this is also the discount rate used to calculate the PV. 

vii. Life expectancy to be 90 years. 

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Goals: 

1. To buy a RM 1,000,000 house at the age 32. with 30% downpayment. The rest will take a 25 years loan.  

2. To retire early at age 45. 

3. A saving buffer of RM 500,000 at age of 45. 

Thus my IPS will be

Return Objective : after tax 5% per year (nominal) 

Risk Objective: 

Ability to take risk - High ( as i am currently still young , with stable income to sustain living）

Willingness to take risk - High

Constraints: 

Time Horizon - Long (two period, first one is 18 years, second one is after the 18 years till deceased)

Tax consideration - as Malaysia dont tax capital gain nor dividend income, there is less concern here. 

Liquidity requirement - Not applicable for the moment. ( or one month expense to sustain living until next salary banked in)

Legal - Not applicable for the moment. 

Unique requirement - to paydown RM 300,000 for house downpayment at age of 32. 

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The first thing to know, is to calculate how much you need to sustain the living standard for 45 years after early retirement.

This can be done by summing the Present Value (PV) of all future expense at age of 45 (year 2033). 

First , the nominal equivalent of RM 2,500 expense today at 2033 is RM 3,899, i will still need to pay house loan monthly installment of RM 3,890. The total PV of the future expenses at year 2033 will then be, RM 2,330,000. Plus the saving buffer desire, i will need to save up to RM 2,830,000 by year of 2033. 

This is achievable if i can save at least 55% of my total income every month. 

Thus current monthly saving target = RM 5,500. 

Things will get complicated when I need to save for marriage, save for some desires in my life etc. This will be address later when i subsequently revised my IPS and setting saving goals. 

My Investment Record (24) - 31st August 2015 & 30th September 2015

Market Overview

Last two months KLCI  hit its lowest point within three years at 1532.14 pt, end up at 1612.74 pt and 1621.04 pt at end of August and September respectively. 

Brewing of 1MDB scandal, anticipation of Fed rate hike, and consistently lower crude oil price results in capital flight out of Malaysia, pushing the ringgit lower and thus tumbling the stock market. 

However, with the annoucement of Value Cap by Najib Administration and subside chance of Fed raising rate this year, KLCI began to stabilize and should perform better as the end of October. 

Current Return and performance

For August 2015, 

The estimated holding period return for KLCI in the past period (1st August 2015 - 31st August 2015) is -6.12% (with dividend included). Holding Period return for my portfolio, is -9.42%. Total holding period return for my portfolio since the inception is -2.46%, annualized to be -0.83%, this is far lagged behind KLCI total return of 8.35% (annualized, 2.79%) 

For September 2015, 

The estimated holding period return for KLCI in the past period (1st September 2015 - 30th September 2015) is 0.82% (with dividend included). Holding Period return for my portfolio, is 2.83%. Total holding period return for my portfolio since the inception is 0.30%, annualized to be 0.10%, this is far lagged behind KLCI total return of 9.23% (annualized, 2.91%) 

Trading Activities

1. Addition of RHB Cap (1066), with impending right issues the stock is currently trading at P/E ratio of about 8, one of the lowest among its peer. As Q2 earning was still steady, this provide a comfortable safety margin for me. 

2. Addition of Maybank (1155). its currently trading at P/E ration of about 12, with projected dividend yield of 7%, which is good for me. 

3. Addition of Public Bank (1295), Public Bank is the MVP stock, it seldom come cheap, when it does, i will just add on . 

4. Addition of Symphony Life (1538), this property stocks have attractive dividend yields with huge unbilled sales and landbank, even though most of the sales may not be realized as profit in this financial year, it still a good bet in the long run. 

Snapshots on what my performance constitute for

Figure 1 shows the stocks that i currently hold, with average cost and current value. The total cost of investing will not be equal to the net capital i invested in, as i do reinvest dividend from stocks (Total about RM 14,000) and realized capital gain (Total about RM 10,400). 

Total Holding Period Return measures the performance of RM 1 invested with me starting day 1. 

The formula will be 

(1+ HPR1) * (1+HPR2)*...*(1+HPRn), 

where HPRn is the holding period return for particular period, measured as change in total portfolio value, and 

current portfolio value = Total capital invested + total unrealized gain/loss + total realized gain/loss + total dividend gain. 

The holding period return measured is better than the straight comparison between the total capital invested and total portfolio value now, this is due to my portfolio sustain greater loss lately when higher capital had been invested, thus resulted in less negative impact on the holding period return. The summary of period holding return vs KLCI return is as per figure 2. 

Figure 1: Summary of shareholding now

Figure 2; Summary of Holding Period Return