No significant fallout from Laos woes

MFCB has built and now operates a 260MW run-of-river hydropower plant.Called the Don Sahong hydropower project, it is located on the Mekong river in southern Laos and is run by MFCB’s 80%-owned Don Sahong Power Co Ltd (DSPC). The group also has solar photovoltaic (PV) investment business activities there.

WITH a looming debt crunch, Laos is facing the risk of being the next in Asia to possibly default.

The country’s cash reserves have plummeted, according to wire reports and there is a serious shortage of fuel amid surging inflation – the same pressures that pushed Sri Lanka to default last month and which threatened Pakistan’s balance of payments.

One Bursa Malaysia-listed company which has significant business in Laos is Mega First Corp Bhd (MFCB).

Under its renewable energy (RE) division, MFCB has built and now operates a 260MW run-of-river hydropower plant.

Called the Don Sahong hydropower project, it is located on the Mekong river in southern Laos and is run by MFCB’s 80%-owned Don Sahong Power Co Ltd (DSPC). The group also has solar photovoltaic (PV) investment business activities there.

The hydropower project, which began operations in 2020 and has a concession period for 25 years up to Sept 30, 2045, is MFCB’s main income earner.

It contributed about 45% of the group’s revenue and 82% of profit before tax in the first quarter ended March 31, 2022 (1Q22).

With an annual cash flow estimated at around RM450mil, the hydropower dam has been a catalyst driving investor interest in MFCB.

But how will this business fare in light of the current situation impacting Laos?

MFCB says that it does not anticipate any significant fallout from the country’s economic woes because the power generated at its Laos power plant is sold to Cambodia and hence the counterparty risk is not specifically Laos.

“We do not foresee the current crisis in Laos to have a significant impact on MFCB. The power generated by DSPC in Laos is 100% evacuated to Cambodia via two government-to-government power purchase agreements signed between Electricite Du Laos (EDL) and Cambodia’s Electricity Authority (EDC),” MFCB executive director Khoo Teng Keat tells StarBizWeek.

EDL is the state corporation that runs and operates Laos’ electricity. Bloomberg, in a June 15, report said the electricity operator accounted for nearly a third of Laos’ publicly-guaranteed debt in 2021 based on World Bank data.

Elaborating, Khoo says revenue collection is smooth.

“Cambodia’s EDC has been prompt in its payment to EDL. In turn, EDL has been paying DSPC every month,” he adds.

Currently, MFCB is constructing Don Sahong’s fifth turbine, which has a size of 65MW and costs about US$65 to US$70mil (RM286 to RM308mil). This was initially scheduled for financial year 2020 but got delayed due to Covid-19.

Khoo says the fifth turbine expansion, slated to be installed by 2024, will continue because of EDL’s energy sale commitment to its Cambodian counterpart totalling almost 700MW following the two PPAs.

However, for solar PV, Khoo says the group “will review the commercial terms for projects which have not yet secured the engineering, procurement, construction and commissioning cost”.

For solar, MFCB has completed projects with an energy capacity of 15MW and secured an additional 27.4MW.

Of the new contracts in hand, 6.3MW is estimated for completion in August or September 2022, while the balance will be progressively done over 24 months.

With MFCB sitting on an outstanding debt of US$120mil (RM528.12mil) as at March 31, 2022, Khoo acknowledges that rising interest rates would translate to higher interest expense in the second half of 2022.

“Nonetheless, given our low net debt to equity position at 14.4% as at end-March, and strong forward cash inflow, the expected increase in interest expense will not have a material impact to group earnings,” he says.

On the contrary, Khoo says that MFCB is a beneficiary of the strengthening US dollar against the ringgit through the translation gain of DSPC’s US dollar earnings.

Packaging division to chart robust growth

MFCB’s two other major business segments are packaging and limestone quarrying.

The packaging business is tipped to see robust growth in 2022 on the back of full-year earnings consolidation from a new upstream packaging unit, Stenta Films (M) Sdn Bhd, plus new production capacities.

Serving primarily the food and beverage sector, Khoo says that the packaging division develops cost-effective, innovative and environmentally-friendly solutions.

“Demand for these will benefit from a global shift in consumer preference arising from increasing concern over the damaging impact of traditional packaging solutions on the environment,” he adds.

Currently the Stenta plant is running at near-full capacity, while the newly-installed capacities at the group’s downstream packaging factory Hexachase are expected to be fully taken up by 2023.

Stenta and Hexachase are planning to set up a new factory each near their existing plants to cater for the group’s five-year growth plan.

According to MFCB, the combined annual revenue potential after the capacity expansion is about RM1.2bil as compared to RM450mil before.

Citing data from leading market research agencies, Khoo believes the size and growth prospects of the global flexible packaging and paper bag markets will be able to absorb the group’s planned capacity expansions.

Moving forward, he says the group intends to expand into the electrical and electronic products, semiconductor as well as the medical device packaging space.

Not unlike other manufacturers, inflationary cost pressures have exerted pressure on profit margins. To defray the cost increase, MFCB has been proactively engaging with customers to review selling prices.

“As demand for the group’s non-discretionary manufactured products is relatively resilient, we have been able to adjust selling prices to offset the bulk of the cost increases,” Khoo says.

On the other hand, he says the “operating environment is expected to remain fluid and challenging” for its resources division which undertakes limestone quarrying.

“Cost pressures arising mainly from higher fuel and energy costs are mounting. While shipping rates have moderated, they remain high.

“Although domestic and regional demand is projected to remain firm, margins are under pressure,” Khoo says, adding that he expects earnings from this division to be “satisfactory,” he says.

Backed by the cash flow from its hydropower dam, MFCB is looking to beef up its war chest to prepare for potential mergers and acquisitions.

In late 2021, the group ventured into the oleochemical and specialty chemicals business by taking up a 50% equity stake in Edenor Technology Group.

Following a restructuring, Edenor posted a faster-than-expected turnaround, recording a profit after tax of RM7.85mil, with MFCB’s share being RM3.93mil in 1Q22.

It expanded into the semiconductor space by investing a 28.83% stake in Integrated Smart Technology Sdn Bhd for RM5.56mil.

While the group continues to be on the lookout for good deals, it is the situation in Laos that investors will keep an eye on for now.

Shares of MFCB, which is 34% controlled by the Goh family, closed at RM3.48 yesterday for a market cap of RM3.39bil. Within the 52-week range, the stock traded between RM3.32 and RM3.89.