Sunday, 12 July 2015

Stock Review – MFCB (3069) (MEGA FIRST CORPORATION BERHAD)

Bursa Malaysia - 3069
Bloomberg - MFCB:MK
Yahoo - 3069 .kl
Webpage - http://www.mega-first.com/

Key Value Investor Criteria: -
Description
Value
Criteria
Point
Price to Tangible Book Ratio
0.68*
< 1
5/5
Stock Valuation
CAPM => 2.90%
Return (2008-2014) => 19.18%
Undervalue by 16.28%
CAPM < Return
5/5
Return on Asset
9.6*
> 0
4/5
Return on Common Equity
10.13*
> 0
5/5
Quick Ratio
2.88*
>1
5/5
Long term Debt / Total Capital
15.56*
<50%
5/5
Continue Dividend over Past 10 Years / Since Inception
Yes
Yes
2/2
Cash From Operation
Positive > 5 years
Positive
5/5
Total Point


36/37
Note:
 *            Data obtain from Bursa Marketplace on 12/7/2015
  

By scoring 36/37 (97.9%), we will look into the annual report and the latest quarterly report of MFCB before making the decision to buy the stock.

By comparing the CAPM method and the average return of MFCB from the year 2008 to 2014. MFCB undervalue by 16.28%. From 2008 to 2014 MFCB is able to provide an average return of 19.28%.

However with such a good valuation and ratio, as a value investor we always look into the annual report, quarterly report and any announcement before making any investment decision.

Company Profile

MFCB consists of three main business divisions as follows:
1)  Power Division – 61.6% of total revenue (2014 annual report)
2) Property Division– 14.5% of total revenue (2014 annual report)
3)  Resource Division –11.5% of total revenue (2014 annual report)

1) Power Division

The power division operating two plants, one in China and other in Tawau, East Malaysia. On 3 March 2015 subsidiary of MFCB Ground Roses Limited and Silver Acreage had signed an agreement with Electricite du Laos (stated owned cooperation in Laos which operated the country’s main generation, transmission and distribution assets in Laos DPR) to undertaking the development and implementation of Don Sahong Hydroplant Project (capacity of 260 MW and 2000 GWh per year).

Since one of the power plant is in China, the weakening of ringgit against Chinese yuan will increase the profitability of the company. Besides that the reducing of coal price will also reduce the operating cost of the coal plant in China and hence increase the profitability.

The downside of this division is the Shaong Xi Power Plant contract end in October 2017 and the Tawau power plant has operation & maintenance contract until 2 December 2017. When these two mega power plant project terminated. MFCB will loss it main revenue unless the management able to start negotiating for extension of contract.

2) Property Division

The property division gives 14.5% of the revenue. However in this sector MFCB only have one high rise project which located in Petaling Jaya, PJ8 while other projects are only terrace link house. MFCB management need to make use of the available vacant land to start build high efficient high rise building to gain some decent profit from this division.

3) Resources Division

This division produced lime stone, it is one of the lime stone provider in Malaysia. As lime stone is one of the main materials in constructing and increasing number of construction sites in Malaysia, this division is expected to provide good sales for this coming year.

This division consists of 2 limestone quarry in Lahat and Gopeng, both is in Perak. MFCB is expecting to increase its limestones producing capacity in Gopeng with addition of 2 new klins and new hydration plants. The phase 1 of the expansion is expect to finished in May 2015. At the time of review there is no news announce by the company on the completion of the phase 1 of the project.

PROS:

  • On March 3, 2015, subsidiary of MFCB had sign an agreement with Electricite du Laos to develop and implement a 260 MW hydroelectric power plant in Laos. The subsidiary of MFCB will owned 80% of the shares of the implementation company.
  • Depreciating ringgit against Chinese yuan will increase the profitability of the company
  • Reducing coal price will reduce the operating cost of the coal plant in China.
  • With increasing of construction sites in Malaysia, the demands of limestone might be increase.

CONS:

  • The two power plant contracts end in 2017, these will affect the revenue of MFCB which has most of its revenue (61.6%) from power division which only consists of these two power plant.
  • MFCB only involve in low rise project which is not profitable compare to high rise project. Only one high rise project in Petaling Jaya (PJ8).
  • No news on the completion of the phase 1 expansion of Gopeng quarry which is expected to finish in May 2015.  

Management

The management team are mostly from business and investment background which do not have any experiences in any of the main business segments in MFCB (Power division, Property division and Resources division).

Most of the management team had directorship in others public listed company which will diverse their focus in MFCB. Besides that three of its directors are in the board for D&O Green Technologies Berhad which has negative operating cash flow in the year of 2010 and 2011. These might shows that the management is inefficient in controlling the cash flow.

CONS:

  • The management does not had experience from the related field.
  • Board of director is holding board position in another public listed company which will diverse their focus in MFCB.
  • Three directors are involve in another public listed company, D&O Green Technologies Berhad which had negative operating cash flow in year 2010 and 2011 which show some sign of inefficient cash flow management.

Financial Statement

For the quarter end 31 March 2015, the gross profit has reduced to RM 33,802,000 from 40,895,000 despite the reduction of coal price. This is due to low demands from both the power plants. However the net profit has increase from RM 10,333,000 to RM 24,735,000 mainly due to high foreign exchange rate.

In the financial statement of the company there are a goodwill on consolidation of RM 10,812,000 which the management can removed from the account anytime when there fell the goodwill does not consists any value. By analysing the balance sheet of MFCB, the company has very low debt and its consist of enough cash to convert all its liability.

MFCB is in a court case for a piece of land in Malacca which the court had order its subsidiary to pay for the damage on the breach of contract in 2005. The damaged claimed amount had not be proven at the court.

PROS:

  • MFCB had profit from the depreciation of Ringgit Malaysia
  • MFCB has low debt and has sufficient cash to cover all liability.

CONS:

  • The demands of the power for both power plant had reduce for the year 2015.
  • A goodview of 10,812,000 can impaired from the financial statement anytime.
  • Losing a court case in 2005 required to pay damage to third party for breach of contract. The damage claim amount is not yet decided