MFCB: Fourth Quarter Earnings Outlook Moderates Amid Currency Pressure

The company is bracing for a moderated fourth quarter performance, with net profit in FY25F anticipated to be lower than the preceding quarter. This projection primarily stems from the anticipated weakness of the US dollar, which is expected to adversely affect the translation of earnings from its critical Don Sahong Hydropower Plant (DSHP) into Malaysian Ringgit.

According to market analysis, the US dollar depreciated by approximately 1.7% from an average of US$1.00:RM4.23 in 3QFY25 to US$1.00:RM4.15 in 4QFY25. This currency shift is a key factor in the revised earnings outlook.

Operational Highlights and Divisional Performance

On a more positive note, the share of losses from the Edenor Oleo joint venture is expected to ease in 4QFY25, supported by diligent cost-cutting measures. Analysts forecast that the company’s share of oleo losses will narrow slightly from RM66 million in FY24 to RM60 million in FY25F.

The renewable energy (RE) division, predominantly DSHP, is poised for a significant boost should the US dollar recover against the Malaysian Ringgit. A 10 sen rise in the USD versus MYR is estimated to improve the RE division’s EBIT by 2%, contributing to its annual EBIT of over RM400 million. Operationally, DSHP is expected to maintain high sales volumes, driven by healthy water levels. Furthermore, a rise in water tariffs is anticipated to offset an increase in DSHP’s tax rate from 0% in FY25F to 5% in FY26F.

In the resources segment, EBIT is projected to remain flat at RM31 million in FY26F. Despite prevailing weak demand for lime products from steel and mining customers, the division benefits from stable petcoke costs. Petcoke prices currently stand at US$160 per tonne, a significant drop from the peak of US$260 per tonne observed during the Ukraine War in 2022, ensuring stable EBIT margins similar to FY25F.

The packaging division is expected to see a 10% improvement in EBIT in FY26F. This growth is primarily attributed to rising demand from new markets, notably the USA, even with a 19% import tariff on Malaysian products. However, the division faces stiff competition from China in the flexible packaging segment, and certain customers are experiencing soft demand for consumer products, which has impacted plastic packaging demand.

Investment Outlook

AmInvestment Bank maintains a HOLD recommendation on the company, with an unchanged target price of RM3.65 per share. This target price is based on a FY26F Price-to-Earnings (PE) ratio of 10x, consistent with its five-year average. AmInvestment Bank’s report notes that the company’s share price has already fallen by 26.1% from its peak, suggesting that many of the existing negative factors have already been priced in by the market.

Key risks identified include ongoing losses in the oleochemical joint venture and potential increases in logistics and petcoke costs. A depreciation of 10 sen in the USD versus MYR is estimated to affect the RE division’s EBIT by 2%.