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This is my Long Term Value Pick for 2020.
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Long Term Value Pick 2020 : Mega First Corporation Berhad (Initial Fair Value RM 10)
This is my 4th “Long Term Value Pick series for 2020”. Reiterating, in the past, my long term value picks include the likes of Allianz, QL, DKSH, RCE Capital, Poh Kong, Riverstone Holdings, Oriental Holdings, Sri Trang Agro amongst others. To be classified as Long Term Value Pick it must meet 5 of my stringent criteria as below :
1. Strong, honest & capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / healthy cash flow
4. Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors
It is extremely hard to find a stock that can meet all the above mentioned criteria. This doesn’t mean all other stocks are lousy stocks but rather, to find a stock that I am willing to lock in my funds long term, it requires utmost justification as the time value of money must correspond with the potential return otherwise it is an act of futility.
So why did I pick MFCB this time? Please note, this is an actual successful power / utilities player. This is not Jaks.
1. Revisiting 2016 - One of My Top Investments Mistake
Mega First Corporation Berhad if you were to do some research it would appear on the surface that they are a conglomerate with diverse business interests across power, limestone & quarry, packaging, property development & plantation. However, in recent years, their core business has been the Hydropower Project in Laos called Don Sahong with generation capacity of 260MW. What is most important is the full commissioning of this long term investment and project in January 2020.
Now back in end 2016 - early 2017, when I first noticed this stock and told my subscribers to consider investing in MFCB, it was trading at around RM 2.10. It was also mentioned in public channel as can be seen from below.
Again in March 2020, I called to buy MFCB at RM 3.40 and below during the plunge BUT I sold everything at RM 4.97. You can see it here.
Fast forward to today, it is trading at RM 7.35. Hence why I mentioned it was my biggest investment mistake. I did not stick to my long term view to hold. Back in 2017, I was worried the delay in construction / commissiong is risky (which it did happen but for a short period only) hence after it hit my FV of RM 2.80, I let go. Subsequently in 2020, after hitting my TP of RM5, I decided to lock in profits to increase my cash holdings in the midst of an uncertain market. I failed to recognised that MFCB commissioning of Don Sahong in 2020 would mean the constant huge cashflow would be flowing be it Covid-19 lockdown or not. Seasonally, the dry season would affect their performance too. Hence, my short term thinking clouded my judgment.
Few financial writers would publicly admit their shortfall, but to me, I made a wrong move. True, I enjoyed a profit of 46% in less than 2 months when I sold at RM 4.97 but I missed out on a further upside of RM 2.42 (+71%). This is why value investing for the long term will always beat the short term trading / contra methods as sitting and riding a fundamental value stock give multiple folds of returns over a duration of time. Please note, MFCB never returned to below RM 4 since March 2020.
2. Strong, Capable Management with Good Track Record
In my first paragraph, I quickly distinguished MFCB from Jaks Resources Bhd. I am sure many investors would have heard about the Jaks and may have a bitter aftertaste thinking about it. The fact remains, Jaks never was a good investment proposition to begin with because they have an incompetent and questionable management team. They are facing a huge LAD claim for failing to deliver Pacific Star project in Section 13 PJ to their joint venture partner, Star Media group, their Evolve Mall in Ara Damansara is a complete failure and of course, their notable "future cashcow", Vietnam Hai Duong Power Plant was delayed as well as draining all the balance sheet of the company. I never publicly wrote about Jaks because it is promoted by prominent investors and have legions of retail investors as fans of the company. My conclusion on Jaks - it has weak management. This article is not about Jaks, so lets leave it as that.
Now how about MFCB? The Chairman and founder of the company, Mr Goh was a graduate of University Malaya and is a seasoned entrepreneur with a strong track record of successes. Importantly, he has notable positive corporate reputation in the business fraternity of Malaysia. He was formerly the Executive Director of IGB Corp Bhd, the owner of Cambrew (Cambodia largest brewery with Joint Venture deals with PepsiCo and Carslberg) in addition to being the Chairman & Founder of MFCB. Have a look below :
Furthermore, D&O Green Technologies, another semiconductor listed company manufacturing for automotive sector shares the common shareholder with MFCB. With the strings of success and reliable track record, MFCB is definitely in good hands and should be not be taken in comparison to Jaks. Another very interesting point is that the entire scale and duration for the project from start to commissioning took 10+ years of effort. Hence, it wasn't that the management build this overnight.
In Malaysia, we know the Independent Power Producers (IPP) sold power to TNB and in turn this made certain business prosper handsomely. For MFCB, Don Sahong Hydropower with the great Mekong River, it has power generation capacity of 260 MW to supply to the power grid of Laos. In addition, neighboring countries such as Cambodia and Vietnam with huge population and much greater need for electricity has signed G2G agreement with Laos to supply power to their grid as well. Hence, MFCB is a huge beneficiary in a strategic location which will contribute to 3 countries which is in dire need of power.
Of course, what we see now is everything coming together and falling into place. But what people do not know is how long and how much effort it took for then entire project to come to commissioning. Investing in MFCB today with clear visibility in earnings in the years to come is a no brainer. The risk is limited with great upside potential. What surprises me is the lack of analyst coverage (Except Public Bank TP RM7.76 which MFCB has exceeded the forecast & Maybank TP RM7.50) and failure of appreciation towards this company's growth prospect. Some may argue that the growth period of MFCB is over, after all the share price has climbed from RM1+ to RM7+ over 5 years. For early investors, this is a multi-bagger. How about going forward? Can it go another 7X? For this, we need to understand the valuation.
4. Solid Financials and Healthy Cashflow (Updated with Q2 2020 Results)
As you can see the last 3 Quarters appears to be bumper earnings starting from Q4 2019 - Q2 2020. Q4 2019 delivered record high net profit of Rm 83 million as it coincides with the trial commercialisation of Dan Sahong. Furthermore, the official commissioning starts from January 2020 based on management guidance. This showed the continued results flow and earnings with Q1 2020 at RM57 million & Q2 20202 at RM 81 million. Q1 was weaker due to the record low levels of Mekong river due to dry weather, and despite so, MFCB still delivered strong earnings. Later on in recent Q2 results, it picked up again due to the wetter weather and hence higher energy availability rate exceeding expectations. There is no doubt the key takeaway from the results are as the following :
1. The results has rerated in tandem with the commissioning of the jewel of the group, Don Sahong Hydropower Project.
2. Management guidance has been honest, transparent and importantly factual. (This to me is one of the most important criteria in determining whether a stock is worthy of our investment)
Furthermore, if you look at the table above, the profit margin has increased steadily from 10+% to 20+% and most recently 40+%. True there is a concern of revenue falling, but do note that the revenue falling is logical because of the completion of the construction of Don Sahong project. We can easily summarise as the higher revenue from before is primarily derive from construction work. Following the commissioning of Don Sahong, it transitioned itself from a construction player to a power generation player which provides higher profit margin.
This is why I am impressed with the management of MFCB. They are able to find revenue / income stream throughout the entire project lifespan instead of continuously expecting shareholders to wait & wait for the windfall day to arrive whilst raising debts & financing.
The explanation above is quite telling. Simply put, power division contribute higher revenue and PAT due to higher energy availability factor 86% compared to 70% Coupled with tax exemption from Laos government for first 5 years of commercialisation of operations, the packaging & labelling division managed turnaround from losses to profit (RM 0.3 million to RM 1.6 million). The downside is the Resources division affected by MCO lockdown both volume and ASP by 30% top line and 50% bottom line respectively.
An important aspect of company that I look at is the balance sheet specially cash position vs liabilities. We all know that power projects are extremely capital intensive with long gestation period before returns can be seen. Now is actually the time where MFCB recoup their investments and lower their debts. As you can see from the above, the company reduced borrowings by RM56 million (from RM 746M to RM 689M) due to repayment of RM 84.7 million in debts and settle RM 90.8 Million to contractor. The cash flow has improved substantially from Rm 8million to RM 123 million. Even cash equivalent has jumped from RM 2 million to RM 89.9 million. To me, this trend will only continue with the strong income from Don Sahong coupled with with the low interest rate environment, there will be further savings as well bringing down financing cost. Naturally, a stronger, cleaner balance sheet will further command premium for higher valuation of the share price.
5. Future & Growth Potential
Well, MFCB is not resting on laurels and definitely not taking it easy with the cash cow now generating returns continuously. I like the management for their continuous pursuit of excellence and expansion opportunities. For Don Sahong, MFCB is seeking to commence the construction of the 5th Turbine. For Solar, the company is seeking to tender for LSS4 by the Government in 2o21. Their joint venture with Pekat Teknologi SB for Solar & Commercial will start contributing to the bottom line of the company in January 2021. For Resources division, the rebound of demand has normalised to pre-pandemic levels. Lastly, the investments in packaging & labelling business is finally paying off. Due to strong demand from overseas customers, the company is embarking on expansion for another 2 more factories between 2021-2022. I expect this division to become a strong contributor in future years gauging from performance of other packaging companies like Daibochi, Thong Guan, PPHB, BP Plastics and Masterpack.
The notable power players in Malaysia are YTL Power and Malakoff. Both are trading at trailing PER of 15.7 PER and 12.66 PER. Unlike MFCB, both companies are considered mature, stable, dividend yielding stocks. Would MFCB transition from a growth counter to a yield counter? I believe so. With the strong foundation provided by Don Sahong, MFCB venture in power generation will continue to grow and the upside is there. Hence, in my view MFCB’s PER valuations deserve at least a minimum of 15x. Of course, you can use DCF calculation for Don Sahong and PER valuation for other divisions to arrive at your ultimate Fair Value
6. Value Growth Investment - What is the Valuation of MFCB?
Originally I was worried due to MCO impact and global Covid-19 lockdown, but my fear was unfounded. Their power plant performance is stellar with continuing growth in contribution increased exponentially QoQ, Packaging also turn from loss to profit with increased +30%, QoQ, Resources (limestone) affected by MCO hence down 30%. Yet despite this supposedly to be a weak quarter, it exceed expectation and show both topline and bottomline growth YoY and QoQ. It is an extremely strong quarter. Furthermore, their growth expansion story is intact with venture in LSS4 Solar, expansion of packaging and label business, improvement in demand for Limestone resources division following lockdown. Under such economic circumstances, it is tough to be bullish about companies. To calculate the FV, my tabulation as below :
Net profit Q2 - 2020 : RM 81.33 million
Total Shares issued as of Q2: 494 million (exercise of warrant & ESOS increased share base)
EPS for Recent Q2 : 18.93 sens
Net profit Q1 - 2020 : RM 57.4 million
Total Shares issued as of Q1: 460 million (exercise of warrant & ESOS increased share base)
EPS for Recent Q2 : 12.5 sens (actual)
Net profit Q4 - 2019 : RM 83.1 million
Total Shares issued as of Q4: 438 million (exercise of warrant & ESOS increased share base)
EPS for Q4 : 19 sens (actual)
Full Year EPS of 4 Quarters : 19 sens (Q4 2019) + 12.50 sens (Q1 2020) + 18.93 sens (Q2 2020) + 12.50 sens (Q3 2020 - using weakest Trailing Quarterly EPS as very prudent forward estimation) = 62.93 sens
PE 12x (Historical PER) - RM 7.55
PE 15x (Peers) - RM 9.43
PE 20x (High Growth) - RM 12.59
Currently it is only RM 7.35, which is around 11x PER valuation which is very cheap as the company has strong forward consistent earnings outlook of Don Sahong (seasonally stronger earnings quarters are the next 2 Q due to wet season) and coming rebound in Resources division. I haven’t factored in further Power generation capacity expansion of the 5th Turbine of Don Sahong, expansion of Packaging factory and potential win for LSS4 Solar project.
7. Conclusion - To Invest?
Due to the pandemic, it is my humble view that it is getting harder to find value stocks which have a healthy horizon of earning visibility in this market. MFCB is one of the few that has strong earnings outlook, fundamental base income and growth trajectory in coming years. Hence, if you are keen to invest in a growth counter with steady income flow, MFCB is a safe choice. However, to enjoy the maximum returns, one has to ride the long term journey as history has shown if I did not let go my initial investments at end of 2016 around RM2.10, I would be sitting on 3.5X returns excluding dividend gained.
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Food for thought: