Investment Highlights

• We upgrade MSM Malaysia to HOLD from SELL as its share price is close to our fair value of RM0.58/share. Our fair value of RM0.58/share implies a multiple of 0.4x on MSM’s NTA of RM1.46/share as at end-FY19.
• However, we are keeping our FY20E net loss forecast of RM70.6mil for MSM.
• MSM’s net losses narrowed to RM56.3mil in 1HFY20 from RM69.9mil in 1HFY19 on the back of a lower effective tax rate and absence of an interest charge for a restructuring of borrowings that took place in FY19.
• In spite of pre-tax losses, MSM incurred interest expense in 1HFY20. MSM’s effective tax rate was 2.1% in 1HFY20 vs. 10.6% in 1HFY19. MSM recognised a positive tax instead of an expense in 2QFY20. Its interest expense declined by 45.3% YoY to RM26.7mil in 1HFY20.
• MSM’s revenue was flat YoY in 1HFY20. The sugar refinery in Johor operated at an average utilisation rate of 23% in 1HFY20 vs. 19% in 1HFY19. Currently, the Johor refinery is operating at utilisation rates of 26% to 30% vs. the breakeven rate of 50%. We believe that the sugar refinery may only break even in FY21F.
• Sales volume of MSM’s sugar products (ex-molasses) was flat at 446,000 tonnes in 1HFY20 (FY19: 1.3% growth) as demand from industrial and retail customers (including SMEs) fell during the MCO (movement control order) period in 2QFY20.
• Breaking it down, sales volume of MSM’s products to the industrial customers rose by 23.5% YoY to 221,000 tonnes in 1HFY20. However, sales volume to the retail customers plunged by 36.3% YoY to 144,000 tonnes in 1HFY20.
• Comparing 2QFY20 against 1QFY20, MSM’s sales volume eased by 10.6% due to the MCO. Sales volume of the industrial segment dived by 33.8% QoQ to 88,000 tonnes in 2QFY20. Sales volume of the retail segment shrank by 22.2% QoQ to 63,000 tonnes in 2QFY20. On a positive note, export sales volumes improved by 172.7% QoQ to 60,000 tonnes in 2QFY20.
• MSM’s net gearing stood at 49.2% as at end-June 2020 compared with 52.7% as at end-December 2019. Operating cash flows were RM130.4mil in 1HFY20 against RM87.6mil in 1HFY19.

Source: AmInvest Research - 21 Aug 2020