This article first appeared in The Edge Malaysia Weekly on June 24, 2024 - June 30, 2024

MEGA First Corp Bhd’s (KL:MFCB) business ventures in the agricultural sector are starting to bear fruit after years of nurturing them. The ventures are now large enough to be a core business for the diversified group, giving it another dimension of revenue.

So much so that MFCB is planning to add a new business segment — food security — to its financial reporting. This will take place as early as the third quarter of this financial year (3QFY2024), ending Sept 30. Its existing core businesses are renewable energy, resources and packaging.

“We have nurtured the food security division over the last 10 years and we think it has turned a corner. We are likely to see a bigger contribution from the division, so we are going to carve it out and show it as one of our core businesses,” MFCB non-independent, non-executive director Yeow See Yuen tells The Edge in a recent interview.

The group has 1,830ha of coconut trees and 730ha of macadamia trees planted in Mondulkiri province, Cambodia, where it has slightly more than 6,000ha of concession land. The coconut plantations are poised to reach maturity this year, while the macadamia may take another year or two to reach maturity. Upon maturity, the yields of the crops are expected to improve yearly.

Notably, macadamia trees typically have full production at between 12 and 15 years. It is similar for coconut trees, which take 15 to 20 years to reach peak production.

With its coconut trees progressively reaching commercial maturity this year, the group has decided to harvest the flower sap of the coconut tree instead of waiting for the fruit, which is seen as an unconventional route for coconut plantations. The flower sap will then be turned into coconut sugar products, which MFCB believes is an underserved market.

“We will sell coconut flower sap as a food ingredient. That is our primary off-taker. We are investing in a small Thai company that has been doing a lot of product development on coconut flower syrup-based food additives and food products,” says Yeow.

In Malaysia, the group recently acquired an effective 40% equity interest in modern farming firm CSC Agriculture Holdings Sdn Bhd, which owns a wholesale distribution centre in Johor and three grocery stores. CSC produces local fruit and vegetables, operating and managing more than 1,100 acres of farm land in Johor and Pahang. The fruit trees have reached maturity or will reach maturity in the next 24 months.

The company is already selling its produce from its 12-acre pilot project farm, done in green houses in Ayer Hitam, Johor, to Singapore and is planning to add more varieties of vegetables to the farm.

“CSC will immediately give us a yearly turnover of about RM80 million to RM90 million. We see the food security division growing exponentially over the next five to 10 years because both plantations in Cambodia and the farms of CSC are beginning to mature,” says Yeow.

For perspective, MFCB recorded revenue of RM1.32 billion in FY2023, with 46% coming from its renewable energy segment. While the contribution from the agricultural ventures may seem small compared with the group’s total revenue for now, the potential of its crops here and overseas is something worth watching.

Yeow highlights that food security as a segment is a “good business” to go into given climate change and its impact on traditional farming. He believes the method of modern farming in greenhouses, where temperature and ventilation are controlled, can yield success.

“We are not tech-savvy. Going into fintech or e-commerce platforms, these are just not our cup of tea. If you want to go into a new business, eventually, it’s all about food. So, food is a good business to go into,” he says.

“There are some who are trying to grow vegetables in greenhouses on a small scale and succeeded, but no one has succeeded yet on a large scale. We will probably be one of the first few to try this out on a large scale.”

MFCB has allocated about 300 acres in Perak for CSC to embark on its modern farming operations that will be done in greenhouses. It is currently waiting for the relevant permit approvals.

While the food security segment is expected to grow going forward, MFCB’s three existing core businesses are also looking positive this year.

Driven by the Don Sahong hydropower plant in Laos, renewable energy is the group’s largest contributor, making up 46% of revenue and 91.8% of profit before tax (PBT) in FY2023.

The hydropower plant’s fifth turbine is expected to be commissioned by the end of this month, which will be just in time for the wet season, allowing the group to run all five of its turbines in the second half of the year.

With the fifth turbine, the total capacity that can be generated from the hydro plant would amount to 325mw. “We should start seeing revenue come from the fifth turbine in July,” says Yeow.

It is worth highlighting that the group has upped its equity interest in the Don Sahong hydropower project in Laos by 20%, giving it an effective interest rate of 95%, which will also boost the earnings of the renewable energy division.

When asked if the group is looking at more hydropower plant projects, Yeow says it is looking around in the region.

“If there are any opportunities, it will probably be in Malaysia or Laos. There are many ways to get exposure to hydropower plants. We are looking at some of the options and hopefully, we can make an announcement about it sometime soon,” he adds, without elaborating.

Apart from its massive hydropower plant, MFCB is also involved in the solar energy business. As at 1Q2024, the group had completed and energised a total of 28.3mw in solar projects while another 14.9mw is expected to be progressively commissioned and energised in the second half of the year. It has secured a 46.5mw solar farm project under the Corporate Green Power Programme by the Energy Commission (EC), which is expected to be commercially operational in 2025.

Yeow says the group is evaluating investment opportunities like the 5th Large Scale Solar programme (LSS5), which was announced on April 1 by the EC.

For the first quarter ended March 31 (1QFY2024), the renewable energy segment reported revenue of RM137.7 million and PBT of RM88.8 million, representing a year-on-year (y-o-y) growth of 7.2% and 0.3% respectively.

Interestingly, its resource division — which is involved in quarrying limestone and manufacturing lime products such as quicklime, hydrated lime and quicklime powder — is starting to see a normalisation of its profit margins.

“We will see the full effect of the normalisation of profits this year. In the past, we were playing catch-up in terms of cost of fuel, even though our revenue was growing,” says Yeow.

In 1QFY2024, the resources division made a PBT of RM14.4 million, more than two times the RM5.8 million it recorded a year earlier, while revenue increased 14.3% to RM63.8 million.

Yeow says the PBT of RM14 million was exceptionally high as some of the volume had been pushed to 1QFY2024 from 4QFY2023 due to a delay in delivery. While the resources segment is not expected to achieve a PBT as high as in 1QFY2024 in the remaining three quarters of this year,  he believes it should perform better for the full year of 2024 as a result of the normalisation in profit margins, which have finally caught up with costs.

“It is not a sexy business, but a very stable and cash generative one. We’re not too worried about competition in this segment because it’s constrained by geographical coverage. Our coverage is only East India to Australia and to the Philippines, we can’t go any further than that because we will not be competitive,” says Yeow.

Meanwhile, its packaging division is poised to report better earnings this year. “We should be able to hit a double-digit growth in profit and turnover after flattish numbers over the last two years that were due to macroeconomic headwinds. I expect this division to grow strongly this year,” he says.

The group has two companies in the packaging division. One of them is Stenta, a flexible packaging material company that manufactures biaxially oriented polypropylene film and linear low-density polyethylene film. The other is the Hexachase group, which manufactures paper bags, flexible packaging products, and labels and stickers.

For 1QFY2024, revenue for the division came in at RM102.8 million, a slight decline of 0.7% from a year earlier, while PBT stood at RM8.6 million, a 17.6% increase from the previous year.

As a group, MFCB’s net profit for 1QFY2024 expanded 35.3% y-o-y to RM95.46 million on the back of a 9.8% drop in revenue to RM313.48 million.

MFCB may seem to be in unrelated segments. However, its investment approach is one that could provide good returns for its shareholders, says Yeow.

“Our philosophy is never to chase after deals for the sake of expanding our portfolio for storytelling. We are not keen on that because we are not trying to create non-fundamental paper value in the company. Whatever project we do, we intend to live out the project,” he adds.

While most of its capital is deployed to its core businesses — and specifically the renewable energy division, solely based on the typically high investment cost — the group also sets aside a small portion to venture into new businesses that fit its investment criteria.

“The most important investment criteria for us is whether we have the right people and whether they are like-minded. If they are, we will back them if it is a scalable industry,” says Yeow.

From RM3.19 on June 20 last year, MFCB’s share price had gained 46% to close at RM4.66 last Thursday, valuing the group at RM4.6 billion. Bloomberg has a consensus target price of RM4.99, suggesting an upside potential of 7.1%.

MFCB is controlled by low-profile businessman Goh Nan Kioh, who has direct and indirect equity interest of 2.77% and 32.13% respectively. 

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