Investment Highlights

• We are keeping our SELL recommendation on MSM Malaysia with a lower fair value of RM2.45/share (vs. RM2.96/share previously). Our fair value for MSM is based on an FY19F PE of 25x.

• We have cut MSM’s FY19F net profit by 18% to account for the impact of a stronger USD on MSM’s production costs. We have assumed an exchange rate of US$1.00:RM4.18 compared with US$1.00:RM4.10 originally. Raw sugar is imported in USD.

• MSM’s 9MFY18 results were within our expectations but below consensus estimates. We expect MSM’s net profit to decline QoQ in 4QFY18 as MSM recognises interest and depreciation expense for the new refinery in Johor. The new refinery commenced operations in November 2018.

• MSM’s net profit improved from RM14.3mil in 2QFY18 to RM15.9mil in 3QFY18 due to a lower effective tax rate. Effective tax rate declined from 28.7% in 2QYF18 to 17.2% in 3QFY18 as MSM reversed the overprovisioning of prior years.

• Revenue slid by 1.9% QoQ to RM562.1mil in 3QFY18 dragged by softer selling prices. On a positive note, sales volume of refined sugar (ex-molasses) rose by 2.1% from 239,000 tonnes in 2QFY18 to 244,000 tonnes in 3QFY18.

• Comparing 9MFY18 against 9MFY17, sales volume of refined sugar contracted by 5.9% to 706,000 tonnes due to weak demand from the exports and domestic markets. Sales volume of MSM’s sugar products to the domestic market (retail and industrial) shrank by 3.3% YoY to 622,000 tonnes in 9MFY18 dragged by competition from imported sugar. Sales volume of sugar products to the export markets plunged by a sharp 21.5% YoY in 9MFY18.

• Gross profit margin edged up from 10.5% in 2QFY18 to 11.0% in 3QFY18. We estimate MSM’s cost of raw sugar to be US$0.1825/pound in 3QFY18 compared with US$0.199/pound in 2QFY18. In contrast, management said that its cost of raw sugar was US$0.14 to U$0.16/pound in 3QFY18. Average exchange rate was US$1.00: RM4.07 in 3QFY18 vs. US$1.00:RM3.92 in 2QFY18.

• Comparing 9MFY18 against 9MFY17, we believe that MSM’s cost of raw sugar declined from US$0.212/pound to US$0.19/pound. Management said that its cost of raw sugar was US$0.14 to US$0.16/pound in 9MFY18 and US$0.185/pound in 9MFY17.

Source: AmInvest Research - 22 Nov 2018