Investment Highlights

• We maintain BUY on MSM Malaysia with a lower fair value of RM2.05/share (vs. RM2.15/share previously). We have reduced MSM’s FY22F net profit by 4.4% to account for a lower sales volume growth assumption resulting from the Malaysian government’s proposal to impose an excise duty on pre-mixed sugary drinks such as chocolate, cocoa, malt, coffee and tea. Examples of pre-mixed drinks are the 3-in-1 coffee/tea packets.

• The rate of the excise duty and the threshold level of sugar allowed were not disclosed in Budget 2022.

• Although we think that pre-mixed sugary drinks are not a major consumer of refined sugar products, we have reduced MSM’s FY22F sales volume to be conservative. We believe that food products such as biscuits and nonpre-mixed drinks, use more sugar than pre-mixed drinks.

• We are now assuming that MSM’s sales volume (exmolasses) would improve by 4.5% in FY22F compared to our original assumption of 5.5%.

• We have assumed that the sales volume of refined products to the domestic market would rise by 4.0% in FY22F while sales volume to the industries segment would increase by 5.0%. Export volumes are envisaged to expand by 5.0% in FY22F.

• We think that the proposed excise duty would result in a reformulation of pre-mixed drinks by consumer companies. Consumer companies are expected to keep sugar levels in pre-mixed drinks below the threshold so that there would not be any excise duty.

• Currently, the sugar tax is 40 sen per litre for two categories of drinks. For non-alcoholic drinks, the threshold level is added sugar levels of more than five grams per 100ml. For fruit or vegetable juices, the threshold level is added sugar levels of more than 12 grams per 100ml.

• The sugar tax took effect on 1 April 2019. The imposition of the sugar tax did not affect MSM’s sales volume in FY19 significantly. MSM’s sales volume (ex-molasses) rose by 1.3% in FY19 after falling by 6.3% in FY18. MSM’s sales volume expanded by 8.2% in FY20 driven by strong exports.

Source: AmInvest Research - 1 Nov 2021