Revisiting Mega First Corporation Berhad (MFCB) Valuation in 2022

Investors always say, 'You only fully understand about the stock after you own it'. Mega First Corporation Berhad (MFCB) is such company that I fully understand after owning it, fortunately it is on a good side. If you notice my previous analysis on MFCB, I have only valued the Don Sahong Hydropower business and avoided the other business because I dont fully understand how to value them yet.

But now, after attending 2022's Annual General Meeting and a few Investor Briefings, I think I have a fair understanding of the different business operations in the group since their management are so transparent in all those meetings. So, I will try to value MFCB as a whole now.

Summary of Mega First Corporation Berhad (MFCB) Business

MFCB is the investment vehicle for the Goh Family. Now, MFCB holds different businesses with the Power Generation segment contributing most of the revenue and profit. The other business under the group includes Packaging, Resources, Oleochemical, Plantation and Others. 

The Power Generation business is the cash cow for the group. This has provided a steady stream of cash flow for the Goh Family to invest in, hence the different pillars of business segments. That is the Goh Family putting capital to work, and they have proved that they are just exceptional capital allocators. 

There are 2 low profile businessmen from the Goh Family, namely Goh Nan Kioh and Goh Nan Yang. MFCB is the vechicle for Goh Nan Kioh, an exceptional businessman driving MFCB while Goh Nan Yang is behind the successful D&O Green Technologies Bhd. 

Don Sahong Hydropower - Discounted Cash Flow

The first part of my valuation is on Don Sahong Hydropower business. This is a fairly easy business to value because all the future cashflow were written down in the Power Sales Agreement with the Laos government. We know about the power generation capacity, the average output and the tariff rate for each year. This allows me to do a discounted cash flow analysis easily.

Of course, there are still a few assumptions made:

1. Amortisation Rate

2. Financing Cost

3. Discount Rate 

4. Maintenance Cost  

I will share the Google Sheet link for this Don Sahong Hydropower Discounted Cash Flow analysis here. You can tweak the number as you see fit.  

In short, the intrinsic value for the Don Sahong Hydropower business is RM3.34 billion based on my discounted cash flow analysis. This calculation is only taking into account of the revenue generated from power sales alone. If they can successfully negotiate a contract out for the 5th turbine, there will only be more upside. 

Solar Power Business

Power generation has always been the core focus on MFCB, so naturally the company will invest in solar. However, I have heard more than once that the management mentioned that the solar business is a low margin business because the competition is intense. It is like a race to bottom, where companies are bidding down the price until margins are in single digit. 

MFCB only focus on bidding solar projects that meet their Internal Rate of Return (I think is around 12% if I remember correctly). Also one thing to note is MFCB is on the power sales side of solar projects, unlike most public listed solar companies that focus on EPCC solar projects. This means that their projects provide recurring revenue for a long period of time. 

Currently, 14.5MW of solar projects are already operational, while 27.5MW are secured and in the pipeline. The internal target set by the company is to secure 15-20MW every year, translating into 100MW somewhere around 2025. From management guidance, a 100MW solar portfolio will contribute around RM50 mil revenue and RM12 mil profit annually.  

With the assumption of MFCB achieving their 100MW goal in 2026, my rough estimate of the solar business intrinsic value is RM65 mil. The number is derived from discounting profit from 2022 to 2026 and Terminal Value of RM60 mil assuming 5x PE multiple in 2026. Feel free to adjust your assumption in the Google Sheet here. 

 

Packaging Business

The second biggest profit contributor for MFCB is the packaging business. There are 2 companies under this segment, Hexachase and the newly acquired Stenta. This segment was small and profitability was volatile in previous years because Hexachase is in the bottom part of the packaging value chain, where competition is huge and pricing power is low. With the acquisition of Stenta, MFCB's packaging business has moved up the value chain and is able to demand higher pricing power.

MFCB is currently expanding the packaging business aggressively with more production lines coming soon, hence enhancing the economies of scale. The capacity will increase from approximately RM400 million currently to RM1.2 billion in 1H2023. 

Since the production line takes time to pick up, we can expect at least RM1 billion revenue annually from the packaging segment starting from 2024. I have previously studied the packaging business before and the gross margin for the packaging business normally falls between 7% to 25% depending on the position in value chain and how well it is managed. 

Net net, I think MFCB can fetch gross margin of 20% in their packaging business and net margin of 10%. Since this is a manufacturing business, the prices for the packaging end-products wont change a lot, compared to commodity business like steel, O&G etc. Thus, I will value the packaging business by estimating their revenue and profit based on their capacity. Then, I will apply a conservative PE on top of the profit estimate.

So, I think that MFCB's packaging business is worth RM674.6 mil, which again is based on very conservative measure of 7x PE only of 2024's high achievable profit. 

Remember that also in the packaging industry, SCGM Berhad disposed its packaging business at 13x PE and Scientex paid 12x PE to acquire Daibochi in 2021. If a PE of 12x is applied, MFCB's packaging business will have a present value of RM1.05 bil, but better to use a conservative number to be on the safe side. 

If you disagree with the numbers, feel free to tweak it with your own valuation. Again, the Google Sheet link is here.

Resources Business

The Resources business is not a sexy industry, but one with steady demand and profit (although not much growth). To recall, MFCB's resources business is involved in producing commercial quicklime and they are the biggest quicklime producer in Malaysia.

Their revenue and profit is very stable for the past few years, with revenue hovering between RM140-155 mil and profit steady at RM16-18 mil range. I dont think there will be any spike or drop in revenue & profit and we can see it as a stable business with minimal organic growth.

Since the Resources Business is a capital and assets intensive business, I will value it based on liquidation value + its earnings power. To find out the liquidation value, I will just trust the management and just take the net assets for the Resources Business. Most of the assets under the Resources Business is last valued at least 10 years ago (some even at 20 years) so I think the possibility of undervaluing the assets is much higher than overvaluing it. Again, playing it safe.

Since the revenue & profit is quite stable for this business, the earnings power can be easily obtained by giving them a PE of 5x, since it is not a growing business. 5 years investment payback period for a non-growing business seems reasonable for me.

From my calculation, the intrinsic value for MFCB's Resources Business is RM350.4 mil. You are welcome to tweak the numbers based on your assumption in my Google Sheet here.

Oleochemical Business

MFCB's entry into the oleochemical business has a very interesting back story, I highly recommend you to read it in my previous MFCB's analysis. With their entry price of RM12.6 mil to purchase a business with net assets of RM283.9 mil, MFCB is essentially buying the business without any cost. Plus, the management team has successfully turnaround the oleo business in Q12022, making a profit of RM8 mil from RM300+ mil revenue. 

Because the turnaround is still in progress, the margin is still at around 2-3% currently. Management are confident to achieve industry average of 5%-10% moving forward. We also need to continue monitor the specialty chemical side which are still loss making. The turnaround will take a bit longer for specialty chemical business, although in the grand scheme of things the losses practically has no impact to the group. 

The valuation method of MFCB's oleo business is similar to Packaging Business. If MFCB can achieve the low side of industry average margin, we can expect RM75 mil of profit on 2024, by then we can expect the business to worth RM525 mil based on 5x PE. Translating that to present value, I think MFCB's oleo business has a intrinsic value of RM527.7 mil. The link to Google Sheet is here, feel free to adjust to your assumption.

Plantation Business

The plantation business involves planting Macademia Nuts and Coconuts. The total land size for MFCB's plantation business is 6,420 hectares and 2,159 hectares have already been planted. The planting process will continue until the end of 2025 and we will only start seeing contribution form the plantation business starting from 2026. 

From management guidance, we know that the yield for Macademia Nuts and Coconuts are quite similar to oil palm, which is 18-20MT/hectare. It is also worthwhile to be noted that peak yield can only be achieved after 7-10 years for both these plants. So, the contribution is expected to be small at first and gradually grow until peak yield is achieved.

The margin of error for valuing the Plantation Business is too high for now because there are too many factors that influence the crop yield in the plantation business. We know that RM100 mil (including land cost) has been invested in the plantation business over the past few years, and another RM90 mil will be invested in the next 4 years. Thus, I will simply apply RM100 mil as the current intrinsic value for the Plantation Business and revalue when more information is available. 

Other Business

MFCB also has 2 business involved in the Electrical and Electronic (E&E) industry, which are the group's legacy business Bloxwich and also the recently acquired Integrated Smart Technology (IST). Bloxwich is a LED and car components supplier for D&O and some major automotive companies. On the other hand, IST is involved in automated test machines for the semiconductor sector. 

Management mentioned that Bloxwich and IST will contribute 'couple of millions' for the group annually. Hopefully these 2 companies can grow big and contribute more to the group, but these are small bets for MFCB at the moment. Thus, to avoid overshooting the valuation, it will be better to assign them no intrinsic value for now and revalue when more information is available.

What is Mega First Corporation Berhad (MFCB) Intrinsic Value?

Now, I will add up all the intrinsic value found for each business to find out the intrinsic value of MFCB as a whole. Since MFCB dont hold full 100% equity portion of some business, we will also derived the intrinsic value accordingly based on their % of stake.

MFCB's stake in different business segments are as follow:

1. Oleo business - 50% 

2. Packaging business - 75%

3. Automate Test Equipment business - 29% 

Thus, adding up all the intrinsic value of different business segments, the intrinsic value of MFCB should be RM4.62 bil, or RM4.89 per share. The current market price is RM3.71 as at 27 May 2022 seems undervalued to me. 

Risks of Investing in Mega First Corporation Berhad (MFCB)

There are 1 major risk that all investors should be aware of when investing in MFCB, which is the risk of Laos Government not paying. If this scenario ever happened, it will be super bad because the Don Sahong project contributes more than 90% of the profit to the group.

This question has also been asked almost in every meetings, the management mentioned that their risk actually is more on the Cambodia government instead of the Laos government. This is because most of the electricity is exported from Laos to Cambodia, hence the payment is actually received from Cambodia government who is the ultimate user of the electricity.

I think the probability of this happening is super low, it is not fair to account that low probability into the valuation. Having said that, the financial standing of Cambodia and Laos government are something that investors should monitor on.

Business Model and Management of Mega First Corporation Berhad (MFCB)

If you have read this far, there is no doubt you can have a better understanding over MFCB's business model. First, they invest in a cash flow generator business. Then, they use the cashflow produced to invest in other business. 

Their Don Sahong project is their cash flow generator and the cash produced are injected into other business including the packaging, plantation, solar and oleo business. Few years down the road, these business will then become a cashflow generator themselves, producing more cashflow for MFCB. And the cycle repeats.

This kind of business model is a compounding machine, where money generated are consistently reinvested for future growth. Another thing to note is that management has so far shown their global view in bidding projects, meaning that they are not restricted to investing in Malaysian business only. 

One day, if they ever ran out of investing options, the company can use the cash generated to either give higher dividends or huge share buyback to enhance shareholders' value. The management's integrity is also tip top as you can see how low the management's remuneration/salary is. The highest director's salary package is lower than RM650k, you can never find this in any public listed company with over RM1 bil market cap in Malaysia. Deep respect to the Goh Family.

In my previous MFCB's analysis, I mentioned that MFCB is the Berkshire Hathaway of Malaysia. It is not only the business model that has similarity to Berkshire Hathaway, but also how the management behave. For example, the management will venture into a new business only when they identified great managers managing the business. The "right people" is more important than the "right business". This teaching is what Warren Buffett and Charlie Munger are preaching for many years, although not many business practice it.

Conclusion

At the current price, I believe MFCB is undervalued provided how conservative I am in valuing every business under the group, the market value is still lower than my valuation. In short, the margin of safety is huge. Not to mention the great management team behind the business, I expect brighter future moving forward.

Let's end this piece with some of the highlights from 2021 Annual General Meeting.