Investment Highlights

• We maintain HOLD on MSM Malaysia with a lower fair value of RM1.10/share vs. RM1.40/share previously. We believe that MSM’s gross profit margin would continue to be eroded by higher costs of raw sugar and shipping.

• Our fair value for MSM is based on FY22F PE of 15.0x. We ascribe a three-star ESG rating to MSM. We have reduced MSM’s FY22F net profit by 17.8% to account for higher costs of sugar production.

• MSM’s FY21 core net profit of RM36.6mil (excluding disposal gains of RM88.7mil) was 40.5% below our forecast and 64.3% short of consensus estimates. Included in MSM’s core net profit were gains of RM31.0mil on the liquidation of excess sugar hedges.

• The discrepancy between the actual results and our forecast was due to higher-than-expected costs of raw sugar, freight and gas costs in 4QFY21. In addition, MSM recorded provisions of RM25.9mil in respect of its sugar inventory and damages at a warehouse in Kota Kemuning resulting from the floods in 4QFY21.

• Dragged by all of these, MSM swung into a net loss of RM16.2mil in 4QFY21. On a quarterly basis, MSM’s gross profit margin was relatively flat at 4.2% in 4QFY21.

• Sales volume of MSM’s refined sugar fell by 8.3% in FY21. Breaking it down, sales volume of refined sugar to the domestic retail market rose by 10.8% in FY21 but demand from the industrial segment slid by 19.8%. Export volumes also declined by 13.2% to 236,000 tonnes in FY21.

• MSM’s pre-tax profit improved to RM81.1mil in FY21 from RM35.8mil in FY20 on the back of higher selling prices. Average selling price of refined sugar in the domestic market increased by 10.5% to RM2,494/tonne in FY21.

• We estimate MSM’s raw sugar cost (including transportation) to be US$0.2113/pound in 4QFY21 vs. US$0.2075/pound in 3QFY21. We estimate MSM’s raw sugar cost to be US$0.1979/pound in FY21 vs. US$0.1402/pound in FY20

Source: AmInvest Research - 23 Feb 2022