Mega First Corporation Berhad (MFCB) Earnings Call Transcript & Summary

Hi, everyone, and a very warm welcome to today's online session. Thank you for taking the time to join us. We hope that you enjoy the session. I'm Terry. Joining me today is John as well as our regular speaker, Mr. Yeow. Mr. Yeow will walk through Mega First's second quarter results and the latest development of the group. [Operator Instructions] And with that, let me hand the floor over to Mr. Yeow.

Thank you, Terry, and warm welcome to everyone. Like before, we will run through the presentation, probably will take about 20 minutes, and then we'll open up to the Q&A session. This is the agenda for this presentation. All right. In the second quarter, the core earnings were actually stable. However, the reported profit was weighed down by Edenor share of losses, which have already seized operations. So these are the residual cost that has been incurred until the final disposal of the factory and business. Normal activity is flat despite marginally lower revenue. But as I mentioned earlier, reported PBT declined almost 10% because of Edenor's share loses. The normalized PBT overall is flat, but the core earnings were actually lower. However, this was offset by higher performance in investment holding and process. On the 3 core division, packaging growth helped to cushion the softer RE and resources earnings. And the investment holding improved MYR 13.7 million, mainly because of ForEx gain. On the PAT after noncontrolling interest, it actually dropped because there's 5% income tax on hybrid earnings, but the reported PATNCI dropped at a faster pace because of the share of the Edenor as mentioned earlier. Moving to the respective division. On renewable energy, the earnings were weighed by overhaul costs in the second quarter and also currency translation loss resulting from a stronger ringgit. Revenue was down 10% and PBT was down 14%, and revenue was down because of 4% lower hydro energy generation resulting from the overhaul of second turbine. And there was also a translation loss of about 7.3%. Because of the lower revenue and also higher overhaul costs, PBT actually fell 14% during the quarter. This chart shows you the water level at Pakse in the first 6 months of the year compared to the first 6 months of 2025. As you can see, the 2026 orange line has actually -- water level has actually been lower in the last 1, 2 months compared to the previous year. But this does not have any impact on the generation because we were overhauling another turbine during the second quarter, whereas there was no overhaul in the previous year second quarter. This is the capacity factor. You will notice the dotted green line, which is the EAF for the first 4 turbines before the [indiscernible] expansion. Historically, it has always hovered higher because of the dilution from the [ fifth ] turbine. Okay. Moving to resources. Demand appears to be finding a floor. Revenue was down 11%. During the quarter, PBT was down 21%. But we do see that stabilizing. If we look quarter-on-quarter, there's actually quite a marked improvement. Revenue was up 15% quarter-on-quarter, right? PBT was up 69%. Lastly, moving to Packaging, quarterly earnings more than double because of higher volumes and also price adjustments resulting from higher raising costs. There's also a precautionary stocking after the Iran war broke. There's a bit of a panic buying. We supported the higher volume as well. The paper sales, it was softer in second quarter because of inventory adjustments and also completion selling into the U.S. The currency was not supportive during the quarter, export currency was down 7%. But PBT actually went up [ 114% ] because of higher utilization rate of the plant plus a price adjustment because of the recent price increases. Moving on to the balance sheet. The main movements of the balance sheet is shown there and the reasons thereof. There's no annual movement other than if you look at the receivable, the receivable was up MYR 52.6 million. That's purely a timing issue. The collection in June was filled over to -- from EDL was filled over to first week of June. So that resulted in an increase in receivable. Cash flow line remains strong. During the first half of the year, we generated a total cash at MYR 255 million [indiscernible], and we year-end MYR 56 million, including MYR 47 million of dividends and retain MYR 154 million cash. Debt helped reduced net debt by MYR 151 million. Out of the MYR 56 million investment deployed, a big chunk goes to the packaging side, MYR 37 million because of the acquisition of additional 12.5% payments in Stenta Films, raising our effective stake to 87.5% from 75%. The capital deployed in the first -- in the first half of 2026, is substantially lower than the previous year, down about 71%, yearly continues to improve. The net debt to equity ratio has further improved to 11.3% as a result of the robust cash flow coming from our renewable energy sector. The Board has declared a MYR 0.05 interim dividend, which is higher than the previous year of MYR 0.0475. So we will continue to step up the dividend as promised some years back. On Edenor, as you all have read from the announcements. The JMO was officially appointed on the 22nd of July. Since the JMO was appointed, the plant has been mothballed, most of the employees have been retrenched, and they are looking for buyers for the plant and business. After the retrenchment, operating losses moving forward should be naturally reduced in the second half, but we are not able to ascertain the financial impact yet because it pretty much depends on the terms of the sale of the restructuring income -- outcome. So for second half, the priorities would be conservation of cash, focus on investment in renewables and also restructuring of our nonperforming portfolio. Renewable energy will continue to be the main earnings contributor in the second half. There will be more -- there will be 2 new projects coming on stream and Solar that should help lift earnings of [indiscernible]. Manufacturing side, we're actually seeing pretty stabilizing -- stabilization of the operating environment. We actually expect resources earnings to be stable in the second half compared to the first half. And packaging, we expect continuous sequential improvement. The key uncertainty affecting second half will continue to be geopolitical developments energies and raising prices, currency movements and the terms of Edenor sales. At the end of 30th June, the capital commitment has reduced only MYR 20.6 million. And this MYR 20.6 million is mainly in our [indiscernible], which is the final payment for the solar project in [indiscernible]. Moving to the last question of outlook. Both turbines have been completely overhauled. So in the second half, we will be operating from [indiscernible] on 5 turbines to take advantage of the wet season. By the end of this year, we will have completed the 2 new solar projects, bringing our total generation capacity to 42 megawatts. We have actually started energizing the multi project and will be progressively completed until end of September. This is a snapshot of our renewable energy portfolio. These 2 projects account for 387 megawatts. Don Sahong, the CGPP solar farm and the Maldives solar. On the manufacturing side, we do expect resources to stabilize, as mentioned earlier, and the packaging continue to be covered in the second half. The key takeaway, our earnings remain very resilient. Our pivot to renewable will continue to grow the RE division. We will continue to clean up our portfolio of noncore businesses. Balance sheet continues to strengthen with net debt falling by MYR 151 million. Packaging should continue to recover as the utilization goes up and we will continue to exercise capital discipline in our future capital deployment. All right. I'll open up for Q&A. Thank you.

Thank you, Mr. Yeow. I think pretty much today, the questions mainly as of now falls on Renewable and Edenor. Perhaps I will just start off from renewable side first then we move on to Edenor questions. I think shareholders are asking about the green power in Cambodia. How is the feasibility studies going on? Any potential time line for development, expected [ COD? ] And are there any potential offers for this project?

We have now conducted a feasibility study for a wind project in Cambodia. Basically, in the concession land where we plant our agricultural products. The [ wind farm ] has already been installed. We will collect data for 1 year. In the meantime, we are applying to the Ministry of Energy to include that project and to feature our development program. So these are baseline concurrently. So if we managed to put in sight then and the feasibility shows that it is feasible, then we should be able to start pretty soon.

And how do think that construction would be?

The gestation period is a lot shorter compared to hydropower. The time is mainly for the fabrication of the wind turbines. There's not that much civil works to be conducted. So it will be much shorter than hydropower probably within 3 years.

Okay. Following the question actually for [indiscernible] on the hydropower side. So aside from [indiscernible] Malaysia, are there any multiple projects that are currently under evaluation for [indiscernible].

I think basically, we are exploring projects across the region. We will participate in [indiscernible] projects. We will [indiscernible]. The deadline is end of August. So it's in about 2 weeks' time. We, as mentioned earlier, we will explore the wind turbine project in Cambodia. Feasibility is now being conducted. We are also exploring a couple of hydropower projects in Laos, but everyone is still at a [indiscernible] preliminary phase. In local Peninsula of Malaysia, we are exploring the fuel project program that the government has including BESS and CRESS, and also possibly pump storage as well.

So with that, you brought up regarding the [indiscernible] announcement of [indiscernible]. One of our shareholders asked if there's any strategy or concessions or -- for concession?

We actually intended to participate. But this time around, the tender is a little bit different. This time around, the authorities actually free economy where the [indiscernible]. And we are right now exploring this period around this [ PMU ], we are not sure whether we will be able to participate, but the intention is there because the land that we have prepared earlier is not within the list of [ PMU ] for this round of tender.

And I think -- sorry, just to jump back to one of the questions on the rate. One of them actually asked, any excess capacity? And is there any estimation of impact required for [indiscernible]?

No. If we do win, it will be in stages, all right? Possibly every stage flow involve about 150 megawatts. And just as a ballpark number, per megawatt cost slightly below USD 1 million per megawatt, so you can book it up roughly between around USD 120 million to USD 130 million for [ sell-side ], doing potentially a MYR 3 billion project, MYR 3 billion project. And for any of the solar projects in Peninsula Malaysia, I think you can safely assume the cost of around MYR 3 million to MYR 4 million per megawatt.

Okay. I think we still have some questions regarding Renewable Energy. Should we move on to -- now, should we move on to -- I think there's another question actually on the solar side. The shareholder asked, based on previous briefing, See Yeow actually mentioned a piece of land in Johor supposed to develop [indiscernible].

Within Johor. [indiscernible] I think it's mostly.

Yes. He's asking, actually what is the latest update on this.

As I mentioned, we actually had a couple of land prepared for [ LSS. ] Unfortunately, the location of this land or the [ PMU ] we wanted to -- talking to are not in the list for [ LSS6 ]. So we are now looking for alternative land or maybe even appeal for our PMU to be in [indiscernible] in the West.

Okay. Okay. And let me just quickly go through the list.

Okay. One interesting question actually just came in, I asked about the [indiscernible]. Does it have any material impact towards the hydro segment? Would there be any -- any sort of magnitude in terms of deterioration of impacts?

Interesting. But as I explained a couple of times in the past, the location of Don Sahong is drawing water from a very big captive area. So the impact on climate as for a much lower impact to Don Sahong, all right? In fact, in the last few weeks, the water level is exceptionally high. It's now reached 12 meters, which is considered as critical. And in fact, too much work is also not good for Don Sahong because it will reduce the quantity such that the generation cannot be maximized. So I do not foresee the [indiscernible] having a very big impact on Don Sahong because of its location and because of how the river flows in that area where it stretches across 10 kilometers wide.

Actually, I think [indiscernible]. Perhaps you can see any interesting questions later, you can post. [indiscernible]

Maybe let us go to packaging. Packaging profit actually improved strongly compared with last year. Do you expect the strong earnings momentum in the Packaging Division to sustain until next year and the year after.

I mean, okay, we actually expanded capacity by building 2 clients, 2 years ago. The completion of the capacity expansion actually came in a very timely manner because there's quite a significant slowdown in consumer spending. And as a result, competition has been intensified and the take-up rate in the first 2 years of post completion was not satisfactory. So today, we are still operating below ideal capacity utilization. But we have been booking towards building a customer base and also building for the customer penetration on existing customers. And I think all these efforts in the last 2 years are starting to yield results. So we do expect revenue to continuously grow sequentially, and with higher utilization rate of the plant, we hope that we can continue to grow our margin as well. And this is what we are seeing in the first -- in the second quarter and also the first quarter, there is especially an improvement. But is it up to expectation, [indiscernible] because even after today, the margin is only about 5%, 6% PBT margin. Whereas if you look at historically, before the capacity expansion, when utilization was high, we managed to achieve 9% to 10% PBT margin. So hopefully, with high utilization rate moving forward, hopefully with competition stabilizing and volatility of the [indiscernible] cost is more stable, we hope to bring back margin closer to 10% PBT margin. So yes, we hope to continue to grow the Packaging over the next few years.

Since you touched on this, especially on [ packaging ] outlook, how do you think about the possible [indiscernible] market? And are there any customers that you actually want to contract? Is there any opportunity in Australia and the U.S. or [indiscernible]?

Okay. Let see the converting side of business mix [indiscernible] business continues to be very competitive. It's very competitive partly because the industry is a lot more fragmented compared to the upstream. We continue to work hard on the cost side of things so that we hope we can generate at least a reasonable PBT margin from the [indiscernible]. The paper side, we are now readily expanding into Europe as well. our market in the U.S., we expect continuous growth there as well as Australia. So these are the 3 key markets of our paper packaging here.

I don't think there are questions on paper packaging anymore. Shall we move on to [indiscernible]. Just a very quick one, it's actually posted by 2 shareholders. Just could management provide an update on the food security segment, in particular, the local modern farming and our Cambodia [indiscernible]? What's the latest?

If you notice in the slides, we now talk very little about Food Security. It is intentional becaue we were a little bit disappointed with the performance of food security. So our primary focus now is to try to turn it around without [indiscernible] We want to turn it around first before we review the longer-term plans for the Food Security. Now Food Security, we already divide it up into 2 main portions. The first is in Cambodia. So on the Cambodia side, the conflict between Cambodia and Thailand is definitely not conducive for us because previously, our sale is mainly through the border, the Thai-Cambodia border. So our primary focus now is on [indiscernible].This year it's the first year that we harvest it. The volume is very small, we only manage -- we only expect to harvest around 70 tons [indiscernible]. So if you to convert that into [indiscernible], this is pretty low. We are talking about only 1 ton to 2 ton of product, okay? So we are now building up the sales channel. So we are now building up the sales channel for [indiscernible]. We are also [indiscernible] we hope to sell to [indiscernible] to Vietnam, China and also within the [indiscernible] region. So we -- on Malaysia side, the investment in CSC, we are still trying to fine-tune the planting technique of the greenhouse has shown tremendous progress, but we are still not very happy with the quality and also the cost structure as well. So more effort needs to be put in there before we consider expanding that part of the business on a much bigger scale. We have already prepared the land. The land is already there. But before we do it, we need to stabilize the planting tactic. We need to improve the quality of the produce and also build the sales channel as well. So all these are being done concurrently. And in the last few months, we have made substantial progress. So for overall food security, we expect this year's losses will be substantially reduced. Last year, we incurred a loss of close to MYR 10 million for the entire food security. This year, we hope to reduce it to below MYR 4 million and hopefully by next year, we will turn profitable, right? A big part of it is in the investment phase, so the losses are going to be expected. And just an update, our Duran farm also gave its first year of fruits this year. The quality is okay, but not fantastic because of year 1 fruit. But unfortunately, the market is very soft because of oversupply situation in Malaysia. And also we believe because of the weather condition, this year's overall nationwide [indiscernible] is not great as well. So the prices have been depressed. And because of that, we are not able to breakeven yet this year. But hopefully, next year, when we are in year 2 maturity with more trees maturing and also more yield per tree, we hope we can make some money starting from next year from [indiscernible].

Understand. Management, we still have quite a number of plans to manage this segment. What if the original business plan does not progress as what we expect? And does management have any plan to enter this security segment?

Food security, we no longer treat it as a core part of our business. As I said earlier, we are now pivoting back to renewable energy. And what we have, we will try to restructure, streamline. The whole idea is we are not pledging a lot more capital into all this. We are trying to restructure. If it is not profitable or if it is profitable, we will try to see whether we can dispose it or go for IPO, like, for example, the packaging division. So all these are in the works, okay? The whole idea is we want to concentrate on renewable energy and capital deployment going forward will be primarily in renewable energy plus the hospital project.

We have something during the [indiscernible] Unfortunately do you think [indiscernible]? This question also back to [indiscernible]. Tell us how feasible investment study that the team has in the past before making the decision.

I mean the investment in CSC is a little bit different. It was a platform, but we are not really buying into what they had. What they had at the time was a wholesale business, right? We had a wholesale business selling dried vegetables like cabbage, [indiscernible], [indiscernible] to caterers, supermarket chains, food processing components in both Malaysia and Singapore. It was -- it's not a loss-making business. It is a profitable business now. And at the same time, we have a few farms that plant things like [indiscernible], [indiscernible], coconuts and leafy greens, right? But when we invested in that, our primary objective is to enter into the greenhouse market, okay? So of course, what they had is legacy, which we hope they will continue to build on it, but there won't be major expansion when it comes to that business. So we were eyeing the greenhouse side of things, all right? So after we came in, we started expanding the greenhouse side. Today, greenhouses have been built on 2 farms. The first farm is in [indiscernible] and second farm is [indiscernible]. In total, we have built about [ 33 ] acres of greenhouse out, of which about 14 acres have been planted, all right? So we now plant a lot of cheese and leafy greens. We are still adjusting the vegetable portfolio. We are now trying to move into salad vegetable as well, which has a better pricing. So the product mix is still being adjusted. The planting tactic is still being adjusted, the cost is still being fine-tuned while we are building the sales channel. So losses that we suffered in the past has substantially been reduced, and we think that we can turn profitable pretty soon on greenhouse side. And once all these things are stable, then only we look into expanding the greenhouse further on what we have to do. We have seen some traction when it comes to that. So we will continue to work on that.

I think that there are quite a number of questions actually on [indiscernible]. We try to summarize it [indiscernible]. I think many have asked regarding the corporate guarantee of close to MYR 50 million and under the JM situation, are there any further residential exposure towards this?