Berkshire Hathaway of Malaysia - Mega First Corporation Berhad

Recently, I have been spending a lot of time analysing the 1,000 companies listed on Bursa Malaysia from A to Z. So far, I have browsed through more than 50 companies and nothing really sparked my interest. While taking a break from reading boring annual reports, I noticed this company that has been sitting in my watchlist for a while, Mega First Corporation Berhad (MFCB).

I first added MFCB to my watchlist when I saw this company in The Edge Tong's Portfolio. Because most companies that The Edge Tong's Portfolio invested in are above average, so I knew that MFCB passed the screener and is most probably a good company. Sadly, I didnt drill down into it until now. How much I hope I did this earlier.

Mega First Corporation Berhad (MFCB)

MFCB is a conglomerate that is involved in different business in totally different industry. The company was originally in the manufacturing of limestone business, but it wasn't until the current board, Goh Nan Kioh and Goh Nan Yang took over the company that it started its compounding engine. Since then, the company ventured into the following pillars of business:

1. POWER: Hydropower plant in Don Sahong, Laos & solar energy solutions in Malaysia

2. RESOURCES: Manufacturing of limestone in Malaysia

3. PROPERTY: Property development in PJ8, Malaysia

4. PACKAGING: Plastic and paper packaging in Malaysia

5. AGRICULTURE: Plantation of coconut & macadamia nuts in Cambodia

6. OLEOCHEMICAL: Production of vegetable oils and fats in Malaysia

Excellent Management with Superb Capital Allocation Skills

Looking into the company's history, it is clear that the management team are good at creating great businesses. This is a very important characteristic for a company to be a compounding machine. In Mohnish Pabrai words, the management has a spawning DNA that is capable of starting different business and remain relevant in this competitive capitalist market. 

When I dig deeper into the management team, I found out that Goh Nan Kioh and Goh Nan Yang are both exceptional businessmen and capital allocators. Goh Nan Kioh and Goh Nan Yang were the founding investor of Cambrew Asia (foreign investing vehicle for Carlsberg) and upon bringing Cambrew Asia to great success, they exited their remaining stake. (Source: here) I believe their experience in Cambrew Asia opened up doors for MFCB to venture into the Cambodia and Laos market. 

What makes Goh Nan Kioh and Goh Nan Yang exceptional businessmen and capital allocators are that their business approach is very similar to Warren Buffett. Warren Buffett first started his winning streaks when he bought See's Candies which is a cash flow generator that would continue to produce a steady, predictable stream of cash for decades. The cash flow generated by See's Candies open up opportunities for Warren Buffett to invest the excess cash in other business, notably Coca Cola.

Similarly, Goh Nan Kioh and Goh Nan Yang uses the power generation business as a means to produce steady, predictable stream of cashflow. We saw this once with the Shaoxing & Sabah coal plant that generated cashflow for the company to venture into property development and packaging business. Now, we see it again with the hydropower plant in Don Sahong, Laos. Using the cash generated from Don Sahong hydropower plant, MFCB ventured into the plantation and oleochemical business.

The second similarity that I noticed from Goh Nan Kioh and Goh Nan Yang to Warren Buffett is their ability to hire the right person for each new business venture. Unlike most conglomerate that hire new manager when they acquire new business, when Warren Buffett acquire a piece of business, he only acquire businesses that already have great management in place. Goh Nan Kioh and Goh Nan Yang do the same with their venture into the hydropower plant (Yeong & Sim, engineer of few mega hydropower plant) and the recent oleochemical business (AK, former MD of KLK). 

Valuation of Hydropower Plant in Don Sahong, Laos

Since the hydropower plant in Don Sahong, Laos contributes 95.7% (RM372 mil) of the company's profit before tax, let's dive deeper. Upon reading the development & concession contract signed by MFCB with the Laos government, the key highlights are as below:

MFCB has already recognized $500 mil USD of revenue and $130 mil USD of profit before tax from the construction of the hydropower plant (2016 to 2019). The company is planning to install the 5th turbine in Q4 2021, which will then recognize another construction revenue of approximately $125 mil USD revenue (own estimate) and $33.5 mil USD (own estimate) in the following 3 years.  

Since the future cash flow for power generation can be easily determined, the Don Sahong hydropower plant behaves like a bond with 25 years coupon payments. With these info, we can simply find out the intrinsic value using discount cash flow analysis. The intrinsic value of the hydropower plant alone (power generation only) is worth RM3.76 billion: 

When comparing to MFCB's market cap of RM3.51 billion (19.09.2021), there is a clear gap in the market value to my intrinsic value. This is because my RM3.76 billion intrinsic value estimation is not even inclusive of MFCB's 5th turbine construction contribution, 6 other businesses and its potential future growth.

 

Prospect

The cash flow from MFCB hydropower plant project is expected to generate approximately RM8.9 bil of free cash flow over the 25 years span. This is perfect for MFCB to invest the excess cash either to expand its 6 other existing businesses or to venture into new industry. Solar could be a huge driver down the road although currently the contribution is still very small.

The highlight of the company's prospect is the plastic and paper packaging business because there is a tailwind in this industry. Although this industry is not one with high margin and can be easily affected by raw material cost, it will still produce substantial return if managed properly. 

The agriculture business in Cambodia involves growing coconut and macadamia nuts. It is expected to contribute positively to the group starting in 2026. The recent acquisition of Emery Oleochemicals (M) Sdn Bhd and Emery Specialty Chemicals Sdn Bhd marked MFCB's venture into the oleochemical industry. If the turnaround of Emery Oleochemicals is successful, it will create synergy to the Cambodia agriculture business for the production of coconut oil and macadamia oil.

Besides, the company has 108 acre of vacant land in Ipoh, Setapak, Sepang and Melaka. They can start property development projects when the property market revives. The manufacturing of limestone may have some tailwinds in the next few years when countries ramp up their mega infrastructure projects to spur economy after COVID-19, but I don't see a long runway in this division due to its capital intensive nature. 

Heads I win; Tails I don't lose much - Mohnish Pabrai

Finding a good capital allocator is never an easy job, especially in Malaysia where coverage on businessmen are scarce. Looking at Goh Nan Kioh and Goh Nan Yang's track record, I believe they are one of the best in Malaysia. It will be interesting to see how the management deploy capital in the next few years. 

Having the opportunity to buy such great management & business at the current price, it will be a low risk huge upside bet.