Investment Highlights

• We upgrade our recommendation on MSM Malaysia to BUY from HOLD with a higher fair value of RM1.20/share (vs. RM0.58/share previously). Our fair value is based on a FY21F PE of 10x. Previously as MSM was making losses, we applied a P/NTA of 0.4x.

• We forecast a net profit of RM84.6mil for MSM in FY21F vs. a reported net loss of RM71.2mil in FY20. The improvement in MSM’s bottom line is expected to be driven by a low cost of raw sugar and higher selling prices for the industrial and export markets.

• Although raw sugar prices have surged to US$0.17/pound, MSM has locked in raw sugar at US$0.13 to US$0.14/pound for 85% of the domestic retail market requirements in FY21F. On the group level, average utilisation rate of the sugar refineries was 58% in 4QFY20.

• The board of directors will decide on the quantum of the MSM’s final DPS later. MSM’s net losses were smaller at RM71.2mil in FY20 compared with RM288.5mil in FY19. This was due to higher utilisation rate at the Johor sugar refinery in 4QFY20 and smaller asset impairments.

• MSM’s FY20 reported net loss of RM71.2mil was within our forecast but worse than consensus estimates of a net loss of RM53.0mil. Included in MSM’s FY20 net loss were asset impairment and write-offs of RM72.4mil compared with RM143.6mil in FY19.

• MSM’s revenue grew by 8.8% to RM2.18bil in FY20, underpinned by higher sales volume and selling prices of refined sugar. Average selling price of refined sugar in the domestic market (wholesale and retail) improved by 4.4% in FY20 after falling by 7.8% in FY19. Recall that selling prices of refined sugar were dragged by competition from sugar imports in FY19.

• Sales volume of refined sugar rose by 8.6% in FY20. Sales volume of refined sugar improved in 2HFY20 after being hit by Covid-19 in 1HFY20. Breaking it down, sales volume of refined sugar to the industrial customers increased by 9.8% to 459,000 tonnes in FY20. Export sales volume climbed by 227.7% to 272,000 tonnes in FY20. On a negative note, sales volume of refined sugar to the retail distributors fell by 33.5% in FY20 due to weak demand during the MCO in 2Q.

• MSM’s net gearing stood at 45.0% as at end-FY20 vs. 52.7% as at end-FY19. Gross borrowings stood at RM907.1mil as at end-FY20 against RM1.0bil as at endFY19. Operating cash flows amounted to RM252.2mil in FY20 compared with RM305.6mil in FY19.

Source: AmInvest Research - 26 Feb 2021