(Tapdance) Low risk high return (4) - MFCB (3069) MEGA FIRST CORPORATION BHD
EVEN IF the market prescribes a mid-single digit cash multiples (~7x) for a utility business – of which power generation is already offtake(n) by Cambodia i.e. future earnings secured, investors are getting the other assets/businesses for free.
In a nutshell, MFCB investors get to coattail on a determined and driven management, one of the most lucrative IRR hydro projects – situated in a power hungry region.
It is especially advantageous to invest in MFCB - which is now at an inflection point - given the various immediate catalysts, the nature of business and geographical location which allows for (almost) immunity in possible second wave of the coronavirus pandemic.
MFCB is a mini conglomerate which owns 1. Hydro and Solar, 2. Limestone quarry, 3. Property and Packaging businesses. By far the biggest earning contributor comes from its hydro plant.
Hydro and Solar
Solar is working on LSS4. Still infant, so we’ll skip.
Despite various obstacles, MFCB pursued Don Sahong (“DS” – a hydro plant situated in Mekong River, Laos) relentlessly since 2006. Hard work paid off. DS registered its maiden power earnings in 4Q2019 (“trial run”) and has since been generating healthy cash flow.
The key is – DS has not shown its full potential yet. The market community has thus far seen the trial run and drought water level earnings contribution. i.e. DS’s real potential is masked.
Like most water system on earth, Mekong’s water level has its own season. Mekong reaches its peak in August to November and gradually plateaus and slows to its low water season.
Another fact less known by many is the severity of the Thailand drought in 2020. The drought was one of the worst in 40 years (ref). Naturally it affected Mekong’s water level.
So, how did DS performed in such dire straits? It surprised the market by earning RM71m EBIT in the 1Q20 period.
If only one thinks about the actual background going-on behind the result. Ask, what happens when Mekong returns to its wet season? absence of the drought impact? The water level is rising fast in recent weeks confirmed by The Mekong River Commission.
Cambodia government has signed an offtake agreement with Laos/MFCB hence future income is secured.
MFCB up-trend is only half-way through given its potential. Based on reasonable estimates – on assumptions given by MFCB in past interviews and reports – DS alone will contribute USD90m (eq. RM380m) PAT group level. That is including USD20m amortization. i.e. in cash flow terms, DS will sprinkle (‘shower’ is a much appropriate term) USD110m (eq. RM465m) cash inflow pa.
Maintenance capex is low given DS is a run-of-the-river hydro. Safe to conclude that cash will flow almost straight back to shareholders’ account.
Based on MFCB current market cap of RM3.1b, it is currently valued at 6.7x cash flow generated from DS alone. So even if one accepts that DS only deserves a mid-single digit earnings multiple, investors are getting the other assets/businesses for free.
By the way, the ultra-low interest rate environment temps many pension-like institutional funds in bidding up for utility like cash flow businesses.
Limestone, Property and Packaging
I’ll just roughly brush through these various ventures to prevent the thesis from going overly tedious. Basically the limestone operation contributes ~RM15 – 20mn pa. PBT since 2015. Limestone is a basic requirement in many heavy industries. Given the diverse application and favorable geographical advantage, the business will remain resilient. MFCB intends to build up its reserves.
The Property division is a scrap mainly consisting some land and/or building which is generating miniscule profits. Management has no intention to drive the business perhaps until a much favorable industry landscape returns.
Packaging was a passive venture until management spotted some scale up opportunity recently. It focuses in paper packaging. The industry size is huge and perhaps the ban of single-use plastic may benefit paper packaging segment. The business has recently breakeven and shall continue to improve as management scales up.
Since the above tangible factors are less known by the public, I thought might as well shed some lights on the even lesser known intangible qualitative factors.
Classy management quality
Determined management to have pursued the DS for 10+ years
Constructed DS at BELOW budget – which is unheard of
Negotiated and secured advantageous financing terms (from 7% to ~2%)
Mr. Goh subscribed and converted warrants years before maturity at premium (for ~RM20m)
Mr. Goh pays himself no salary, and the whole board of directors were paid RM1.38m only
So why the opportunity?
DS is still in its maiden contribution year. Naturally market would want to see it first to believe it.
Market is not aware of the severity of the drought (and Mekong’ seasonal effect) hence does not understand the real potential of DS
Perhaps it is also the environmental led stigma in the water dam businesses, of which MFCB has addressed these concerns in the past.
Management adopts a low profile approach.
In a nutshell, MFCB investors get to coattail on a determined management, one of the most lucrative IRR hydro projects – situated in a power hungry region.
It is especially advantageous to invest in MFCB now given the immediate catalyst, and nature of business and geographical location allows (almost) immunity in possible second wave of the coronavirus pandemic.
DS real potential to surface in coming quarters – PAT / FCF at RM380m / RM465m.
Immune to second wave pandemic (should it happen)
Solar division clinches LSS 4 – MFCB a formidable contender for its caliber and resources