Investment Highlights

• We maintain BUY on MSM Malaysia with an unchanged fair value of RM2.15/share. We have a BUY on MSM for its earnings turnaround in FY21E as it is expected to swing into the black on the back of higher selling prices, lower cost of raw sugar and absence of asset impairments.

• Our fair value is based on a FY22F PE of 15x. We have raised MSM’s FY21E gross DPS to 6.0 sen from 2.0 sen based on a dividend payout of almost 50%. The gross DPS of 6.0 sen translates into a yield of 4.6%. We ascribe a three-star ESG rating to MSM.

• We forecast MSM’s sales volume growth to be 3.5% in FY21E vs. 8.2% in FY20. The group’s strong export sales volume is expected to compensate for weak domestic demand in FY21E. We have assumed MSM’s export volumes to be 351,000 tonnes in FY21E, 30.0% stronger than in FY20.

• MSM has already locked in 65% to 70% of its export orders. In spite of the Covid-19 outbreak in Vietnam, demand for refined sugar from the country is still positive. MSM plans to export 190,000 tonnes of refined sugar to Vietnam in FY21E vs. 118,000 tonnes in FY20. Vietnam is one of MSM’s top export markets.

• To minimise the impact of the high cost of raw sugar, MSM may sell more refined sugar to the industries and export segments instead of the domestic retail market. MSM passes on the high cost of raw sugar to the industries and export markets in the form of higher selling prices. In contrast, price of refined sugar to the end retail customer in Malaysia is fixed at RM2.85/kg.

• The retail market accounted for 29.4% of MSM’s sales volume in 1QFY21 while industries accounted for a larger 41.6%. Exports and sale of molasses made up the balance 29.0% of MSM’s sales volume in 1QFY21.

• MSM has locked in 37% of FY22F’s raw sugar requirements for the domestic retail market at US$0.15 to US$0.16/pound. The cost of raw sugar for the domestic retail market in FY21E was US$0.13–US$0.15/pound.

• The Johor sugar refinery is expected to achieve a utilisation rate of 50% by the end of FY21E. Currently, it is still below 30% as there are issues with the second boiler. This is expected to be resolved in 3QFY21. MSM plans to ramp up the utilisation rates at the Johor sugar refinery to 60% to 65% in FY22F and 75% to 80% in FY23F.

Source: AmInvest Research - 28 Jul 2021