Mega First’s Renewable Energy Empire: Sustainable or Just a Lucky Streak?

[i4value]

Over the past decade Mega First has grown its renewal energy segment so that today its is the main earnings contributor. As can be seen from the left part of the chart, the contribution for the other segments are not very significant.



When you look at the  earnings trend for the Renewal Energy division, you have to remember that there have been changes in the source of revenue over the past 12 years. Refer to the right part of the chart.

Initially the revenue and earnings came mainly from the China and Tawau projects. When these ended in 2017, the revenue from the construction of the Loas hydro plant became a significant contributor.

In 2022, with the completion of the construction of the hydro project, power sales from the hydro project became the biggest revenue contributor.

Its main renewal energy business today comes from its hydro plant in Laos that has a long-term concession (until 2045) providing it with stable cash flows.

Over the past few year, the Group has delivered good returns and is financially sound. Part of this good performance was due to the tax incentives for the hydro plant. My valuation assuming that there is no longer any tax incentives showed that the market price reflects the business value.

Overall, while Mega First has built a strong renewable energy platform, its long-term attractiveness as an investment will depend on how well it navigates some the following  challenges and opportunities.

• Will the Laos economy have a long growth runway?

• How will the company maintain its earnings momentum once the tax benefits taper off?

• Are there plans to acquire new projects or enter new markets to provide a growth path?

For more insights refer to Is Mega First Corp an investment opportunity?

[weijian]

hi i4value,

Thanks for this excellent writeup on Mega First. I missed out the tax free status of its Laos hydropower subsidiary when I was looking through it a couple of months ago. So, reading your writeup allowed me to update my notes of this critical information.

Some quick notes below:

(1) Because the hydropower plant is on a 25year concession. There is actually a return of capital component, in addition to the return on capital. So it is understandable that the Executive Chairman is looking to reinvest the cashflow into new business ventures. After all, he has had a history of doing so. His entire clan is also working at the company and very ready to utilize the proceeds to "maximize" shareholder value. There is an IPT loan that the company had taken to build the hydropower plant and so probably other ways for the decision makers to assess the cashflow besides dividends.

(2) ChatGPT has mentioned that due to Laos' geography along the Mekong river, it has a lot of such dams. Hydropower is a big export item to its surrounding countries - China, Thailand and Vietnam. As such, its prospects are not just limited to Laos' real GDP growth but will also be affected by its neighbors. Anyways, the slowing numbers are real numbers and for all we know, hydropower rates might actually be pegged to inflation and so nominal numbers would be much better.