Investment Highlights

• We are maintaining our SELL recommendation on MSM Malaysia with a lower fair value of RM1.22/share (vs. RM1.55/share previously). Our fair value of RM1.22/share for MSM is based on an FY20F PE of 20x. We have reduced our PE assumption for MSM to 20x from 25x.

• We believe that MSM does not deserve a premium PE valuation anymore as the imposition of the sugar tax in Malaysia and growing health awareness are expected to affect industry demand for sugar.

• We have reduced MSM’s FY20F net profit by 13.8% to account for a lower sales volume of refined sugar products. We believe that MSM would be affected by the imposition of sugar tax in Malaysia from July 2019 onwards. We forecast sales volume of MSM’s sugar products to inch up by 0.6% in FY20F vs. 2% previously.

• For FY19F, we have slashed MSM’s net profit by 73.4% to account for lower selling prices and higher depreciation expense and effective tax rate. MSM’s depreciation expense surged by 95.9% YoY to RM16mil in 1QFY19.

• The rise in depreciation expense can be attributed to MSM’s sugar refinery in Johor, which commenced operations in November 2018. At the same time, we believe that revenue from the new sugar refinery was minimal in 1QFY19 as it sold less than 50,000 tonnes of refined sugar.

• MSM’s 1QFY19 results were below our expectations and consensus estimates. The group reported a net loss of RM7.1mil in 1QFY19 compared with a net profit of RM15.8mil in 1QFY18 and a net loss of RM10.3mil in 4QFY18. MSM was hit by a 12% fall in overall selling price, higher depreciation expense and an increase in refining costs in 1QFY19.

• MSM’s revenue shrank by 11.6% YoY to RM485.6mil in 1QFY19 dragged by lower selling prices. Recall that the selling price of sugar sold to the retail market was cut by 10 sen to RM2.85/kg in September 2018. Also, we believe that MSM lowered the selling prices of its sugar products sold to the industrial players due to competition from cheaper sugar imports.

• Sales volume of refined sugar (ex-molasses) inched up by 0.9% to 224,000 tonnes in 1QFY19 from 222,000 tonnes in 1QFY18.

• Breaking it down, sales volume of MSM’s refined sugar to the domestic wholesalers improved by 12% YoY to 121,000 tonnes in 1QFY19. However, sales volume to the industrial players slid by 7.4% to 87,000 tonnes in 1QFY19 from 94,000 tonnes in 1QFY18. Export volumes of refined sugar fell by 20.0% YoY to 16,000 tonnes in 1QFY19.

Source: AmInvest Research - 24 May 2019