Summary
MFCB has finalised its new SPPA and SCA, with key changes including an LCOE of 6.15 cents (on a discounted basis), royalties applying only to electricity generated above the cap of 2,140 GWh/annum (covered by an upfront payment of USD 82.5m), and a tax structure increasing from 5% to 24%.
We raised our earnings estimates for FY24F, FY25F, and FY26F by 12.0%/5.1%/3.2%, to reflect a more favourable USD/MYR exchange rate and higher contributions from DSHP.
We maintain our BUY recommendation with a higher target price of RM5.15, based on a Sum-of-Parts (SOP) valuation and an assigned four-star ESG rating.
New PPA Structure. MFCB has signed a Concession Agreement (SCA) with the Lao Government and a Supplemental Power Purchase Agreement (SPPA) with Electricité Du Laos (EDL) to incorporate the fifth turbine generator. These new agreements will take effect on 1 Jan 2025 and run until 31 Dec 2049. Key updates include:
Tariffs. Starting at 6.00 US cents and increasing to 6.20 US cents by 2029, this translates to an LCOE of 6.15 (on a discounted basis). This new structure offers less volatility.
Existing Scheme: Features a 1% annual increase from 6.15 cent/kWh over 15 years, followed by a one-time 20% reduction, after which the 1% annual increase resumes until the end of the concession period.
Royalty Payments. Royalties will apply exclusively to the electricity generated above the cap. The first four turbines are covered by an upfront payment of USD 82.5m capped at 2,140 GWh/annum. This new structure reduces ongoing royalty obligations and provides financial predictability.
Existing Scheme: Imposes a royalty rate of 5% of the first 10 years, 15 % after 10 years and 30% for last five years annually throughout the concession period, payable to the Laotian government.
Taxes. Starting at 5% in 2026, gradually rising to 24% by 2030.
Existing Scheme: Maintains a tax-free status for up to 5 years from the first COD in 2020.
Our takes. Assuming no changes in forex rates, the recalibrated tariff framework, coupled with reduced royalty payments and a lower tax rate, is projected to bump up DSHP’s PBT by 1.8% in FY25F and 3.0% in FY26F respectively. Despite the anticipated improvement in operating cash flows under the new PPA framework, we maintain a prudent 23% dividend payout ratio. This conservative stance accounts for the substantial capex required for the CGPP (30MW) project and the submitted 60MW bid for LSS5. To recap, MFCB is aiming to add 15-20MW of solar capacity annually, with 94.7MWp installed as of 3QFY24. These projects are estimated to require c.RM200m in capex.
Earnings revision. We raised our FY24F/FY25F/FY26F earnings estimates by 12.0%/5.1%/3.2% to RM449.4m/RM379.3m/RM384.3m. These adjustments reflect a more favourable USD/MYR exchange rate of RM4.50 in FY24F and RM4.40 in FY25F (vs previously RM4.30/RM4.20), alongside stronger contribution from DSHP from the new PPA structure.
Valuation & Recommendation. In light of the revised earnings outlook, we maintain our BUY recommendation for MFCB with higher target price of RM5.15 (from RM5.00), based on a sum-of-parts (SOP) valuation along with an assigned four-star ESG rating. We favour MFCB for its (i) defensive earnings profile, with ~90% of PBT contributed by recurring income from the Renewable Energy segment, (ii) commitment to pursue growth to enhance shareholder value, and (iii) strong balance sheet and cash flow position, with net gearing of 0.1x as of 3QFY24 and positive operating cash flow of above RM500m/pa.
Risk. Appreciation of MYR against USD, higher-than-expected petcoke prices, and a slower-than-anticipated recovery in the packaging segment.
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Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.390206 | 4.425718 |
EUR | 5.008717 | 5.015095 |
CNY | 0.603029 | 0.603828 |
HKD | 0.565660 | 0.569770 |
SGD | 3.345779 | 3.370205 |