Investment Highlights

• We are upgrading MSM Malaysia to HOLD from SELL as its share price is below our fair value of RM1.02/share. Our new fair value of RM1.02/share (vs. RM1.20/share previously) is based on a P/NTA of 0.6x compared with 0.7x originally. The lower P/NTA accounts for the risk of further asset impairments for MSM. We forecast MSM’s NTA/share to be RM1.69 as at end-FY19E.

• MSM’s performance in 9MFY19 was below consensus estimates and our expectations. The group reported a bigger net loss of RM185.0mil in 3QFY19 vs. RM65.4mil in 2QFY19 due to a RM137.3mil impairment on property, plant and equipment. Excluding the impairment, MSM’s net loss would have been RM47.8mil in 3QFY19.

• We have increased our forecast of MSM’s net loss for FY19E to RM132mil from RM120mil as operating expenses were higher than expected.

• MSM’s performance was poor in 9MFY19 as the group was hit by a 9.2% YoY fall in domestic selling prices and a 1.1% decline in sales volume. Refined sugar prices fell due to competition from imported sugar and Tradewinds Group’s Central Sugar.

• In addition, MSM was affected by higher interest and depreciation expenses attributed to the new sugar refinery in Tanjung Langsat, Johor. Interest expense surged by 303.6 YoY in 9MFY19 while depreciation expense increased by 281.3%.

• MSM’s sales volume (ex-molasses) slid by 1.1% YoY to 698.000 tonnes in 9MFY19. We believe that the fall in demand was due to customers switching to imported sugar products, which are cheaper. Also, we think that industry demand for sugar might have declined as the sugar tax on packaged drinks took effect in Malaysia on 1 July 2019.

• Breaking it down, sales volume of sugar to the industrial segment slipped by 2.1% YoY in 9MFY19 while sales volume of sugar to the retail segment rose by 6.7%. Export sales dived by 28.6% YoY to 60,000 tonnes in 9MFY19.

• On a quarterly basis however, sales volume of sugar products (ex-molasses) improved by 13.5% in 3QFY19 as there was less competition from imported sugar products. We understand that most of the quota of sugar imports under the approved permit system had already been used up.

Source: AmInvest Research - 21 Nov 2019