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.