Investment Highlights

• Maintain SELL on MSM Malaysia with a lower fair value of RM2.96/share. Our fair value for MSM is based on an FY19F PE of 25x.

• We have reduced MSM’s FY19F net profit by 9.3% to account for a lower sales volume of 3.6% vs. 6% previously. We believe that MSM’s sales volume would be affected by the excise duty on sugary drinks.

• Malaysia will be imposing an excise tax of RM0.40/litre on 1 April 2019 on two categories of drinks. The two categories are: (i) non-alcoholic beverage containing added sugar of more than 5 grams per 100ml; and (ii) fruit or vegetable juices containing added sugar of more than 12 gram per 100ml.

• The silver lining is that the tax is not imposed on other products with sugar such as chocolates or biscuits.

• The excise duty on drinks is negative for MSM. Consumer companies may change the formulation of their beverage products to avoid the sugar tax.

• This may result in a reduction in the usage of sugar or a switch to sugar substitutes such as stevia and aspartame. For instance, Coca-Cola Co introduced the zero-sugar drinks to the US market in August 2017. The group plans to introduce zero-sugar beverages to the rest of its key markets this year.

• Due to the excise duty on sugary drinks, prospects for MSM’s sugar refinery in Tanjung Langsat are uncertain. The sugar refinery is expected to start commercial operations in November 2018. The sugar refinery’s production capacity is about 1mil tonnes per year.

• Malaysia joins a growing list of countries, which have imposed a sugar tax on drinks. The UK imposed the soda tax in April 2018. In Mexico, sales of sugary drinks dropped by 5.5% in 2014, the first year of the implementation of the sugar tax and 9.7% in 2015.

Source: AmInvest Research - 5 Nov 2018