We came away from Mega First’s recent post-results briefing with mixed views on the company outlook as management sees headwinds for both oleochemicals and packaging businesses amid dwindling demand and volatile material prices. Meanwhile, EAF for the Don Sahong hydropower plant is expected to reach the full year average of 94%-95%. Overall, we maintain our Outperform call with an unchanged SOP-based TP of RM4.74. We think the company’s inexpensive valuation is unwarranted given that it is trading at only 8x FY23 PE, which is significantly below the industry average of 11-12x.

• EAF for Don Sahong Hydropower remains high. The energy availability factor (EAF) for Don Sahong Hydropower plant in Laos is expected to stay around 97%-98% for the final quarter, bringing the full-year average EAF to around 94%-95% (2021: 91%) or an estimated electricity production of 2,150 GWH. It is worth noting that the energy tariff has an upward revision by 1% to 6.27 US cents effective 1st Oct 2022. Backed by i) high EAF, ii) Ringgit weakness (vs RM4.185 recorded in 4Q 2021) and iii) upward revision for energy tariff, partially offset by higher interest expense YoY by USD600k (RM2.7m), we expect to see improved renewable energy margins for the final quarter. Next year, each turbine will undergo a scheduled maintenance for 10-15 days. Revenue collection remains healthy with receivable turnover averaging at 4-5 months. Meanwhile, construction of the 5th 65MW turbine, which costs about USD70m-75m, is on track to be completed by 3Q 2024, with the projected EAF at about 41%.

• Easing margin pressure for limestone business. Management sees lower cost pressure for the limestone segment on softening petcoke prices in tandem with lower crude oil prices. Demand in the short-term is expected to be lacklustre due to the slowing global economic growth. Currently, export volume makes up 60%, with the remainder from the domestic market.

• Seeing headwinds in packaging. Weakening consumer spending power comes on the back of escalating cost of living and rapidly rising interest rates, which has negatively affected demand for both paper and flexible packaging products. Management shared that current inventory remains high as customers plan to have shorter inventory cycles in terms of placing orders. The excessive packaging stocks will exert pressure on some of its packaging products in the short-term due to stiffer price competition. It will continue to work on I) improving production efficiencies, 2) diversifying and 3) strengthening customer base and prioritising marketing efforts in overcoming these challenges. Following the recent capacity expansion, the utilization for Stenta and Hexchase stands at 85% and 60%, respectively. Meanwhile, management intends to push forward with the construction of two new factories by Hexachase (downstream) and Stenta (upstream), albeit the estimated completion date has been pushed back by 3-6 months to end- 2023.

Source: PublicInvest Research - 6 Dec 2022