Investment Highlights

• We are keeping our SELL recommendation on MSM Malaysia with an unchanged fair value of RM1.55/share. Our fair value for MSM is based on an FY19F PE of 25x. We are keeping our FY19F net profit forecast of RM43.1mil for MSM for now. MSM will only decide on its dividend payments in a board meeting in March 2019. None was declared in 4QFY18.

• MSM’s FY18 results were below our expectations and consensus estimates. The group reported a net loss of RM10.3mil in 4QFY18 due to an 11.9% QoQ increase in administrative expenses and a 491.8% QoQ jump in interest expense resulting from the new sugar refinery in Johor. Interest expense surged to RM21.3mil in 4QFY18 from RM3.6mil in 3QFY18. The new sugar refinery has only sold 15,000 to 20,000 tonnes of low quality refined sugar in FY18.

• MSM’s outlook in FY19F is expected to be uncertain, dragged by competition from imported sugar and impact of the sales tax on drinks. At the same time, interest and depreciation expenses are expected to increase in FY19F due to the new sugar refinery in Tanjung Langsat, Johor. The new sugar refinery commenced operations in November 2018.

• MSM’s net profit swung to a positive RM35.6mil in FY18 from a negative RM32.6mil in FY17 underpinned by a fall in the cost of raw sugar. Raw sugar accounts for almost 90% of MSM’s production costs.

• MSM said that its cost of raw sugar was less than US$0.14/pound in FY18 compared with US$0.18/pound in FY17. In contrast to management’s numbers, we estimate MSM’s raw sugar costs to be US$0.2204/pound in FY18 vs. US$0.2266/pound in FY17. Exchange rate realised was US$1.00: RM4.0422 in FY18 against US$1.00: RM4.332 in FY17.

• Revenue declined by 16.1% to RM2.2bil in FY18 due to lower selling prices and sales volume. Sales volume shrank by 4.9% in FY18 due to competition from imported sugar and smuggled sugar.

• Selling price of refined sugar fell as the government reduced the selling price of sugar to the retail market by 10 sen to RM2.85/kg in September 2018.

• Sales volume of refined sugar to the domestic customers slid by 7.4% in FY18 while exports of sugar plunged by 20.9% to 110,000 tonnes in FY18.

Source: AmInvest Research - 21 Feb 2019