Summary
Future earnings growth and sustainability will be supported long term RE segment revenue visibility, dominant position in quicklime market, transitioning into sustainable resource consumption in packaging segment as part of ESG initiatives, potential turnaround in oleochemical business with upgrading of machines and stronger contribution from plantation segment.
We initiate coverage on MFCB with a BUY recommendation and TP of RM5.00 based on SOP valuation.
Investment Highlights
Long term sustainable recurring income.MFCB is finalising a new 25-year Power Purchase Agreement (PPA) for the Don Sahong Hydropower Plant (DSHP) in Laos, which includes the addition of a fifth turbine. This will supersede the current agreement, extending from 2045 to 2049 (tentatively new PPA). With the fifth turbine expected to operate at an Effective Availability Factor (EAF) of 40%, increasing the total average EAF to 80%, this segment could generate an average of RM400m in PBT annually, contributing RM300m/annum in the RE segment’s free cash flow to equity.
High FCF yield backed by stable earnings. Historically, MFCB on average registered ~7% FCF yield, with net dividend yield of c.2%. Looking forward, we forecast MFCB’s dividend payout ratios at 22%/26%/27% resulting in forward yields of 2.2%/2.4%/2.6% for FY24F to FY26F respectively. Pre-tax profit is expected to be sustainable at c.RM450m, driven by: (1) resilient performance from DHSP with a 20% depreciation reduction based on carrying value; (2) gradual commercial operations of its solar portfolio, contributing RM14m to PBT (three-year CAGR 43.4%); (3) stabilising petcoke prices at USD115/MT, supporting PBT margins above 10% in resources segment; and (4) recovery in the packaging segment, contributing 10% to overall PBT.
Oleochemicals business expect to turnaround soon. MFCB holds a 50% stake in a joint venture with 9M Technologies in Edenor Technologies, which acquired Emery’s Asia Pacific oleochemicals business from Sime Darby Plantation Berhad and PTT GC International Limited for RM12.6m. This facility, located on a 34-ac site in Klang, has a production capacity of 300,000 tonnes/annum. Current operation is at loss-making status, due to outdated design, which hindered efficient operation. We anticipate the segment will break even by end-FY24 and achieve core net profit of RM21.6m and RM33.6m by 2025 and 2026 respectively, supported by the near-completion of repair and upgrading processes and a stabilised utilisation rate of 80% to 85%.
ESG initiative. MFCB has implemented several initiatives to achieve net zero emissions by 2050, including: (i) DHSP's reduction of 1.2m tonnes of CO2 annually and the generation of 2m RECs; (ii) the use of 90% biodegradable materials, solvent-free plastics, and toluene-free printing inks and laminations in its packaging segment; (iii) targeting the addition of 15-20MW of solar capacity annually, with 95.9MW installed as of 2QFY24, in line with the national clean energy plan; and (iv) mandatory ESG training for 59 Tier 1 suppliers. These initiatives have earned MFCB an ESG rating of 2.9 from FTSE Russell. We believe these credentials will drive long-term growth, particularly as the market shifts toward ESG-focused investments and mandates.
Medium term growth by domestic cultivation business. MFCB acquired a 64% stake in CSCAH, marking its entry into the cultivation and wholesale distribution business. CSCAH operates over 1,100-ac of farmland across Johor (five farms) and Pahang (one farm), with 600-ac planted with long-term crops nearing maturity. CSCAH is in piloting modern greenhouse farming of leafy vegetables on 12-acin Johor, with plans to expand based on the pilot's success. The primary distribution channels include local supermarkets and exports to Singapore, capitalising on higher margins due to stringent quality standards. We expect this initiative to generate RM5.7m and RM6.6m in PBT for FY25F and FY26F (accounting for c.1% of Group’s PBT), with potential for further growth as most long-term crops mature over the next 24 months.
Long-term growth through Cambodia plantation business. MFCB holds a 50-year concession for a 6,428-ha plantation, with 2,560-hacurrently planted. Of these, 71.5% are dedicated to coconuts and the remainder to macadamias. Instead of selling fresh coconuts, MFCB harvests coconut flower sap, which it sells to a Thai F&B company under a sole off-taker agreement, achieving higher margins due to stringent quality requirements. The Group is prepared to invest USD2-3m to scale this operation to commercial levels. Over the next five years, we expect food security segment to generate annual revenues of RM200-300m once all crops reach full commercial capacity, positioning as one of the core business areas.
Venture into medical industry. MFCB is finalising an SPA with MCE Holdings to acquire a 13,263 sqf freehold hospital land in Setia Alam for RM43.7m, with a cut-off date set for Sept 24. The Group plans to invest RM250-300m in capex to develop a full-fledged medical centre, led by a group of established doctors. The centre is expected to have 120-130 beds in Phase 1, with plans to expand to up to 500 beds in Phase 2, which set begin operations in 2029. At this juncture, we have not factored in any contributions from this venture, which could potentially lead to a re-rating, pending further details on the development.
Valuation & Recommendation
We initiate coverage on MFCB with a BUY recommendation and a target price of RM5.00 based on a Sum-of-Parts (SOP) valuation.
We assigned a 14.0x P/E multiple to the Packaging segment, representing a premium of 24% to the average forward FY25F P/E of respective peers, justified by sustainable packaging solutions with using recyclable or biodegradable materials.
We assign a 14.0x P/E multiple to Resources segment, reflecting a 70% premium valuation compared to respective peers, premised to MFCB status one of the largest commercial quicklime producers and commands c.40% market share in Malaysia.
For the Food Security segment, we assigned 9x P/E multiple, representing -1.0 standard deviation to the two-year historical mean average index, considering the smaller market size.
For Oleochemicals, we assigned a 8.0x P/E multiple, which is the average forward FY25F P/E of respective peers, as we remain bullish on the oleochemicals turnaround with bright prospects moving forward.
For RE, we are derived using the DCF methodology, with key assumptions cost of equity 7.9%.
We believe our valuation is justified premised on:
Defensive earnings. As of 1HFY24, c.80% of profit before tax were contributed from RE. We foresee a more stable earnings outlook for MFCB after entering a new 25-year PPA in its DSHP and ongoing efforts to expand solar capacity by 15-20MW annually.
Market leadership position in commercial limestone. MFCB owns and operates the largest limestone reserves in Malaysia, commanding a 40% market share as the largest quicklime producer. This distinction sets it apart as other players do not hold a dominant position in the field.
Sustainable player. MFCB aims to achieve net-zero emissions by 2050. Key practices include transitioning to renewable energy sources, sustainable resource consumption, water and waste management, and biodiversity conservation. These efforts have boosted its FTSE4Good ESG scoring to 2.5-3.6.
Willingness to expand. MFCB is pursuing inorganic growth by venturing into distribution, plantation, and oleochemicals businesses. These efforts aim to achieve an average ROE of 10%.
Solid business fundamentals. MFCB consistently delivers a core margin of c.30% and an average free cash flow to equity of RM250m annually.
Disclaimer
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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.455268 | 4.488135 |
| EUR | 4.716585 | 4.723137 |
| CNY | 0.616518 | 0.616862 |
| HKD | 0.572409 | 0.576643 |
| SGD | 3.318330 | 3.343262 |