Investment Highlights

• We maintain HOLD on MSM Malaysia with a lower fair value of RM0.85/share (vs. RM1.02/share originally), based on a lower multiple of 0.5x (vs. 0.6x previously) on MSM’s FY19E NTA of RM1.69/share. We reduce the P/NTA multiple as we think that it is challenging for MSM to find a strategic partner.

• We attended MSM’s analyst briefing yesterday. The group is optimistic on its FY20F outlook. MSM aims to pay dividends in FY20F after none since FY17. MSM is still looking for a strategic partner. Currently, we forecast a smaller net loss of RM36.4mil for MSM in FY20F compared with RM132mil in FY19E.

• Our FY20F earnings forecast assumes that the average selling price for MSM’s industrial customers would improve by 2% to 3%. Average selling price in the domestic market fell by 9.2% YoY in 9MFY19. We also estimate that MSM’s sales volume (ex-molasses) would rise by 2.5% in FY20F (vs. -1.1% in 9MFY19). We have assumed a raw sugar cost of US$0.16/pound (including transportation cost) in FY20F.

• MSM plans to raise the selling price of its sugar products sold to industrial customers in FY20F in line with the recent rise in raw sugar price. According to Bloomberg, raw sugar price rose by 14.2% to US$0.1471/pound as at 4 February 2020 from US$0.1288/pound as at 1 October 2019. MSM is in talks with its customers over this.

• As for retail customers, MSM plans to reduce the margin given to wholesalers by more than 5%. MSM is engaging with its wholesalers over this. MSM has about 297 wholesalers currently, who sell refined sugar to retailers. The retailers then sell refined sugar to the mom-and-pop customers.

• MSM Johor plans to increase export sales in FY20F due to limited growth in Malaysia. The group is eyeing Singapore. Apart from refined sugar, MSM plans to export high valueadded products such as sugar syrup and premixed sugar.

• MSM Johor plans to achieve an average utilisation rate of 28% in FY20F, 37% in FY21F and 42% in FY22F vs. 20% in FY19E. The breakeven level at the pre-tax profit level is 48% to 50%. Recall that MSM Johor has a production capacity of about one million tonnes per year.

• MSM has locked in 30% of its FY20F raw sugar requirements at US$0.13 to US$0.14/pound (excluding transportation premium of about US$0.015 to US$0.02/pound). The group is now allowed to procure three to six months of raw sugar only vs. the previous practice whereby MSM was allowed to lock in one to two years’ requirements of raw sugar.

Source: AmInvest Research - 5 Feb 2020