Edenor Plant Repair And Increased Ownership To Strengthen Future Prospects

Key Takeaways

• Increased ownership stake in DSPC and improvements in the Edenor plant are expected to enhance earnings and net margins.
  
• Strategic investments and restructuring efforts in renewable energy and finance aim to drive revenue, improve liquidity, and reduce financial risks.
  
• Operational challenges, foreign exchange losses, and market conditions are pressuring Mega First Corporation Berhad's profitability and margins across multiple business segments.

Catalysts

An investment holding company, engages in renewable energy, resources, packaging, property, plantation, oleochemical, and automation equipment manufacturing businesses in Malaysia, Lao PDR, other ASEAN countries, India, Bangladesh, Papua New Guinea, Australia, New Zealand, and internationally.

• The additional acquisition of a 15% stake in DSPC to increase effective ownership from 80% to 95% is expected to boost PATAMI by enhancing earnings attributed to the company. This is likely to have a positive effect on net margins.
  
• Completion of the stabilization and repair of the Edenor plant, including the boiler by mid-December, is expected to improve operational efficiency and potentially turn around earnings in 2025, impacting overall profitability and net margins positively.
  
• Renewable energy division growth is anticipated due to higher energy volume from the addition of a fifth turbine and potential positive outcomes from tariffs negotiations by 2025, likely enhancing revenue and earnings.
  
• Capital commitments projected at MYR 160 million for renewable energy are likely to drive revenue growth in the energy division, including new solar projects and extensions, enhancing future cash flow and earnings.
  
• Strategic moves to address long-term receivables with the Lao government through term loan restructuring will improve liquidity and stabilize cash flow, impacting both the balance sheet and reducing financial risks.

Mega First Corporation Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mega First Corporation Berhad's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.8% today to 27.9% in 3 years time.
• Analysts expect earnings to reach MYR 436.0 million (and earnings per share of MYR 0.51) by about January 2028, down from MYR 439.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR494.8 million in earnings, and the most bearish expecting MYR384.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the MY Renewable Energy industry at 5.1x.
• Analysts expect the number of shares outstanding to decline by 2.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

Mega First Corporation Berhad Future Earnings Per Share Growth

Risks

• Higher foreign exchange losses, amounting to MYR 18.4 million, have negatively impacted profit before tax (PBT), reducing overall earnings and profit margins.
  
• The capacity issues in the Edenor plant continue to affect operations, causing delays in plant stabilization and potential sales, which could affect future earnings and profitability.
  
• The domestic and global overcapacity and subdued consumer sentiment in the packaging business have led to margin pressure due to price competition, impacting revenue and net margins in this segment.
  
• Increasing operational and maintenance (O&M) expenses due to the addition of the fifth turbine and higher interest rates on loans could offset potential revenue gains from increased energy volume, thus affecting net earnings.
  
• The volatility in commodity prices and currency fluctuations pose substantial risks to the oleochemical sector, affecting the company's ability to maintain consistent revenue and profit margins.

Valuation

• The analysts have a consensus price target of MYR5.01 for Mega First Corporation Berhad based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR5.36, and the most bearish reporting a price target of just MYR4.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR1.6 billion, earnings will come to MYR436.0 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of MYR4.21, the analyst's price target of MYR5.01 is 15.9% 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.