April 02, 2023

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Mega First Corporation Bhd - Long Term Value Stock (Q1FY21 Update)

For MFCB which is my long term value stock in 2020 remains to do very well. It is important to note that the results for Q1FY21 was supposed to be the weakest quarter due to supposedly dry season resulting in lowest contribution from Don Sahong. Despite that, their EFA is 80% compared to last Q1 at 70+% because wet season came early.

On top of that, resources division improved significantly despite the higher freight cost, container cost and lower ASP due to increased demand. Then packaging division shown a surge due to growth both in revenue and profit to RM2.6 million which is fivefold the year earlier. Quarter on quarter, the profit was down marginally due to spike in raw materials cost (reisin price and freight cost increased).

However, that being said, what matters more to me is to look at the operational cashflow and their debt level just like what I mentioned in my book. Cash has increased to over RM215 million and debt have reduced continuously to about RM 456 million at present. A year ago, it was RM 670+ million. What is more comforting is the RM 215 million on hand can now cover the short term borrowings of RM 100+ million. Clearly you can see the gap is narrowing and the huge amount of cash inflow into the company. 

A major corporate move also happened recently with MFCB which warrants our attention. MFCB have decided to acquire Stenta Film (http://www.stentafilms.com.my/) for RM 205 million all cash deal. This is a significant on 2 levels : 

1. MFCB is expanding on the packaging business division moving moving along the value chain from downstream to midstream

2.  MFCB is showing us how it intends to use or deploy their cash for business expansion

I deem this M&A exercise by MFCB to be value accretive. This is probably why they were conserving their cash for instead of paying out more dividend apart from lowering debt. They were gunning for M&A with this being an all cash deal of RM 205 million. This make sense now. 

When Maybank research chose to downgrade MFCB last quarter for not declaring dividend in line to their expectation, I found it to be perplexing. The reason is because MFCB was using the cash to lower debts. As an investor, would you not consider this good business ethics and practice? I would rather the company I invest in to use excess funds to pay off debts, lower finance cost (which translates to higher bottomline) and consequently enhance value of the stock instead of just a short term gain of higher dividends.

As Stenta is a private company, their financial information is not readily available but based on a CTOS search it shows that the company financial numbers look healthy especially in recent years. From 2015 - 2019, we can see that the :

1. Revenue has grown from RM 131 million to RM 164 million (CAGR of 4.6%)

2. Profit after tax has grown from RM 2.27 million to RM 12.24 million (CAGR of 40%)

Stenta is a leader in flexible packaging with exports market to over 50 countries. In addition, their clients spans FMCG, medical, healthcare and gloves. This is a synergistic acquisition for MFCB and would definitely help to expand their plastics packaging business division.

This is why MFCB is one of my long term value stock in 2020. I believe it will get better through 2021. Management has even given a very clear guidance, despite the overall challenges faced, all 3 divisions will do even better in 2021 compared to 2020. Now if 2020 is a record year and 2021 will be a better year, what does that tell you? Ultimately, as investor, if you recognised a good company with wonderful management, it is imperative to not easily let go. I can see Don Sahong being the cashcow will continue to generate substantial cashflow for the company which in turn will be used to enhance or venture into other business ventures whilst rewarding shareholder and improving the Return on Equity (ROE) for investors. Maintain FV of RM 10 (Please note the management have announced share split hence post share split of 1 for 1, the FV would be RM 5)


For link to my new book - "Once Upon A Time In Bursa", please click HERE :

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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.

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