Don Sahong Reliance Will Hurt Renewables While Hope Persists

Key Takeaways

• Revenue growth faces headwinds from lower hydropower tariffs, increased competition in renewables, and risks from regulatory or environmental factors impacting project timelines.
  
• Reliance on core hydropower assets and exposure to geopolitical, financing, and foreign exchange risks may undermine earnings stability and future profitability.
  
• Margin erosion and revenue volatility from fierce competition, project concentration, climate risks, unproven new ventures, and rising costs threaten earnings sustainability and return on equity.

Catalysts

Engages in renewable energy, resources, and packaging businesses in Malaysia, Lao PDR, other ASEAN countries, Papua New Guinea, India, Bangladesh, Australia, New Zealand, and internationally.

• Although Mega First's expanding renewable energy capacity-across hydropower, solar, and now battery storage-aligns well with the ongoing global push for decarbonization and increased electrification in ASEAN, the company's revenue growth is at risk of being constrained by recent reductions in hydropower tariffs, intense competition in solar and battery storage markets, and potential regulatory shifts or environmental activism impacting project timelines.
  
• While MFCB is diversifying its portfolio with new solar and battery storage projects to capture opportunities from rising ESG mandates and scalability in renewables, margins could deteriorate due to rising global interest rates raising financing costs, as well as the compressing IRR in highly competitive tenders, which may erode future earnings and return on equity.
  
• The long-term offtake agreements on core hydropower assets provide cash flow visibility and should bolster net margins, but heavy reliance on the Don Sahong plant increases concentration risk; any operational, regulatory, or climate-driven disruption to this asset could sharply reduce group earnings and raise volatility in reported profits.
  
• Despite prudent capital allocation strengthening the balance sheet and enabling further growth investments, rising geopolitical instability in Southeast Asia (such as conflicts affecting Cambodian or regional demand/collections) and foreign exchange translation losses could diminish the quality of earnings and impair free cash flow, muddying the near-term outlook for net profit growth.
  
• Although technological advancements and favorable government incentives are supporting renewables industry-wide, fast-falling costs for solar, wind and batteries increase the risk that hydropower's longer-term economic competitiveness declines, potentially slowing the pace of new project development and pressuring long-term revenue expansion for Mega First.

Mega First Corporation Berhad Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Mega First Corporation Berhad compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Mega First Corporation Berhad's revenue will decrease by 8.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 22.8% today to 31.6% in 3 years time.
• The bearish analysts expect earnings to reach MYR 435.6 million (and earnings per share of MYR 0.46) by about August 2028, up from MYR 405.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the MY Renewable Energy industry at 8.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.72%, as per the Simply Wall St company report.

Mega First Corporation Berhad Future Earnings Per Share Growth

Risks

• Intense price competition from Chinese and regional players in both Resources (lime products) and Packaging divisions is putting sustained pressure on margins and sales volumes, as evidenced by the sharp decline in revenue and profits in these divisions, which could continue to erode group earnings quality over the long term.
  
• The Renewable division remains heavily reliant on the Don Sahong Hydropower Project in Laos, raising concentration risk; any regulatory changes, supply disruptions, or adverse renegotiations in the power purchase agreement could significantly impact revenue stability and long-term cash flows.
  
• Within hydropower, changing water levels and climate variability (such as excess or insufficient river flow) already affect the plant's efficiency and utilization rates, and are likely to pose ongoing risks to power output and revenue as climate-induced weather volatility increases over the years.
  
• The company's investment in new areas like battery energy storage and food security/plantations involves uncertain returns, with management openly admitting that expected internal rates of return on BESS projects are low (below 8%), and food/agri ventures are niche, experimental, and exposed to unpredictable yield and execution risks, heightening the risk of resource misallocation and drag on return on equity.
  
• Rising finance costs, higher capital expenditure, and foreign exchange volatility-due to the company's exposure to US dollar borrowings and exports-have already negatively impacted net profit, and could continue to pressure bottom-line earnings and dividend growth if global financial conditions tighten or currency risks persist.

Valuation

• The assumed bearish price target for Mega First Corporation Berhad is MYR3.68, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Mega First Corporation Berhad's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR5.8, and the most bearish reporting a price target of just MYR3.68.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MYR1.4 billion, earnings will come to MYR435.6 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of MYR3.5, the bearish analyst price target of MYR3.68 is 4.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.