This article first appeared in The Edge Malaysia Weekly, on January 25 - 31, 2016.

AFTER nearly 10 years of research, Mega First Corp Bhd’s (MFCB) hydropower project in Laos is finally underway. All that remains is for the group to finance the 260mw Don Sahong hydropower plant that will take an estimated US$500 million to build and which should be completed by late 2019, if not earlier.

The almost 30% depreciation of the ringgit against the greenback may have made the project much larger to undertake but MFCB executive chairman Goh Nan Kioh is confident of pulling it off.

He also believes the project could be a key earnings growth driver, bringing in profits of at least US$100 million a year.

“You cannot get a better project than this in the world. It is environmentally friendly because there is no dam. It is run-of-the-river hydroelectricity. Technically, it is simple to build. It is economically viable and it is affordable,” Goh tells The Edge.

The Don Sahong project, in which MFCB has an 80% stake, has a short payback period of barely five years compared with the average of 10 years for traditional hydroelectricity projects. It is a 25-year concession with an internal rate of return of 17% at the project level, according to its director Yeow See Yuen. But based on leveraged IRR, it could be even higher for MFCB.

Note that MFCB will fund 100% of the project, remarks Yeow. “To optimise our returns, we have decided to build only 260mw, which will give us about 90% yield. That works out to be about 2,000gw hours per year. At 6.15 cents per kWh, that works out to about US$120 million in revenue each year.”

The operational cost of the project is estimated at around 2% to 3% of revenue while royalties will cost 5%. Hence, the project should generate about US$110 million in profit before interest and tax.

Yeow is optimistic that MFCB will be able to develop the project for less than US$500 million — a figure that includes a modest contingency allowance for higher costs.

“Since we don’t have to build a dam, the project is quite straightforward. We don’t have to flood a huge area, like the Three Gorges [dam in China]. The project only affected the homes of 11 families and we have relocated them to nice and proper bungalows,” says Goh, who is the single largest shareholder of MFCB with a 32.86% stake.

The tycoon also dismisses environmental concerns, pointing out that the portion of the Mekong where Don Sahong will be located is almost 10km wide with 17 channels.

Work on the plant is already underway, led by China’s Sinohydro Corp Ltd, which MFCB had appointed in October last year as the engineering, procurement, construction and commissioning (EPCC) contractor for US$320 million.

A temporary coffer dam has already been completed upstream, allowing the 4km stretch of river to dry up so that widening and deepening works can begin as well as the construction of the powerhouse where the hydropower turbines will be installed.

Other than the EPCC cost, the company has spent about RM100 million (US$30 million) to date — RM30 million on hard costs like bridges and access roads and RM70 million on soft costs like consultation fees. The only other major cost is the US$10 million the company will need to spend on building a 100km transmission line to connect Don Sahong to the grid.

Financing in US dollars not a problem

To finance the project, MFCB is proposing a three-for-five rights issue to raise up to RM250 million. In contrast, the company’s market capitalisation stands at RM501.4 million. Goh has undertaken to subscribe for the full entitlement as well as excess rights in aggregate with the undertaking for 50% of the total rights shares.

To avoid triggering a mandatory general offer, Goh and parties acting in concert are also proposing an exemption in the event their holding is in excess of 33% post-exercise, which is a likely outcome.

The issue will include two free warrants for every five rights shares. The rights can also be subscribed for in US dollars since most of the funds raised will go towards developing Don Sahong.

MFCB is also aiming to raise US$150 million in debt. “In terms of foreign exchange risk, MFCB doesn’t have much exposure since the cost of the project and the revenue generated will be in US dollars. The problem is that the weak ringgit has made the project much larger for us to take on. However, it does not affect the merits of the project,” explains Yeow.

The good news is that the group has managed to hedge about 30% of its EPCC cost in renminbi since it generates the bulk of its cash in that currency from its cogeneration power plant in Qixian in Zhejiang province, China, which produces steam for industrial consumption.

“As Sinohydro is a Chinese company, some of its cost will be in renminbi. So, it has agreed to take payment of RMB500 million (US$80.58 million) in the local currency with the interest rate fixed at 6.205 against the US dollar,” says Yeow.

Much of MFCB’s cash of RM286.94 million (as at Sept 30, 2015) was denominated in renminbi. According to Yeow, RMB160 million of this cash was paid to Sinohydro in the fourth quarter.

Besides power generation, the group’s quicklime business is another growth catalyst. The division contributed RM6.4 million or 13.7% to PBT in the last quarter. Quicklime has wide usage, ranging from industrial and construction to water treatment, and it generates gross margins of 30% to 40%, notes Yeow.

“Over the past few years, we have seen multinational industrial mineral companies like Lhoist and the Sibelco group acquire local quicklime players. We are still the largest producer in the country as we are increasing our capacity by 460 tonnes a day to over 1,160 tonnes a day,” he adds.

According to Yeow, the new multinational competitors are also expanding their capacity but he is not too worried about the increased competition because quicklime prices are relatively stable and the commodity is not exposed to speculative trading.

MFCB’s shares closed at RM2.26 last Friday, valuing the company at only 6.5 times earnings per share of 35 sen.

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