Investment Highlights

• We are keeping our SELL recommendation on MSM Malaysia with a lower fair value of RM1.20/share (vs. RM1.22/share previously). Our fair value of RM1.20/share for MSM is based on a P/NTA of 0.7x. We forecast MSM’s NTA/share to be RM1.71 as at end-FY19E.

• We are now forecasting a bigger net loss of RM120.0mil for MSM in FY19E vs. RM19.0mil previously. We have also forecast a net loss of RM30.8mil for FY20F compared with a net profit of RM42.6mil originally. We have reduced MSM’s FY19E and FY20F net profit to account for higher interest expense and lower selling prices.

• MSM’s 2QFY19 results were poor. The group reported a larger net loss of RM65.4mil in 2QFY19 vs. RM7.1mil in 1QFY19. MSM’s net losses widened QoQ in 2QFY19 due to a 612.9% surge in interest expense and a 2.2% rise in the cost of sales.

• MSM said that the higher interest expense in 2QFY19 was due to the modification of certain terms in respect of its Islamic term loan. MSM’s gross borrowings stood at RM1.2bil as at end-June 2019.

• We believe that MSM’s cost of sales increased by 2.2% QoQ in 2QFY19 due to the depreciation of the MYR against the USD. This resulted in imports of raw sugar being more expensive. Average exchange rate realised was US$1.00: RM4.1344 in 2QFY19 vs. US$1.00: RM4.12 in 1QFY19.

• Currently, we forecast MSM’s sales volume (ex-molasses) to decline by 3.5% in FY19E but improve by 2.5% in FY20F. We believe that industry demand for sugar would be affected by competition from imported sugar and the imposition of sugar tax on packaged drinks. Recall that the sugar tax took effect on 1 July 2019.

• MSM’s revenue slid by 14.5% YoY to RM959.5mil in 1HFY19 due to weaker selling prices. MSM reduced the selling prices of its sugar products in 1HFY19 to compete with imported sugar and Tradewinds Group’s Central Sugar. According to news reports, imported sugar from Thailand is 40 sen–RM1.00/kg cheaper than locally refined sugar. We think that the average selling price of MSM’s sugar products in Malaysia fell by 11% YoY in 1HFY19.

• MSM’s sales volume (ex-molasses) shrank by 3.5% YoY to 446,000 tonnes in 1HFY19. Comparing 2QFY19 against 1QFY19, sales volume of MSM’s sugar products slid by 0.9%.

• Breaking it down, sales volume of sugar products to the industrial segment eased by 4.8% YoY in 1HFY19 while sales volume of sugar to the retail segment rose by 1.3%. Exports of sugar products plummeted by 19.6% YoY to 41,000 tonnes in 1HFY19.

Source: AmInvest Research - 22 Aug 2019