Investment Highlights

• We maintain HOLD on MSM Malaysia with a lower fair value of RM0.90/share vs. RM1.10/share originally. Our fair value for MSM is based on an unchanged PE of 15x on FY23F EPS. We ascribe a 3-star ESG rating to MSM.

• We reduce MSM’s FY23F net profit by 39.7% to account for higher costs of raw sugar, gas and freight.

• For FY22F, we assume that MSM would record a net loss of RM92.9mil (vs. a net profit of RM52.6mil previously) due to higher production costs. We have not imputed any increase in selling price for the domestic retail market as this is dependent on approvals from the government.

• MSM’s 1QFY22 results were below consensus estimates and our forecast. MSM swung into a net loss of RM27.7mil in 1QFY22. Consensus had expected MSM’s net profit to be RM69.9mil for FY22F.

• Included in MSM’s 1QFY22 net loss were realised gains on Brent crude oil option contracts of RM5.6mil, unrealised gains on Brent crude oil option contracts of RM1.4mil and unrealised gains on sugar futures contracts of RM1mil.

• MSM was affected by increased production costs in 1QFY22. In addition, production volumes fell by 8% due to a shutdown in MSM Johor. Average utilisation rate at MSM Johor was only 12% in 1QFY22.

• We estimate that the cost of raw sugar (including insurance and freight) rose to US$0.22/pound in 1QFY22 from US$0.17/pound in 1QFY21. MSM was also hit by a weaker MYR vs. USD as raw sugar is imported in USD. Average exchange rate realised was US$1.00: RM4.26 in 1QFY22 compared with US$1.00: RM4.06 in 1QFY21.

• Sales volume of refined sugar inched up by 1.3% YoY in 1QFY22. Sales volume of refined sugar to the industrial market rose by 1.0% YoY to 100,000 tonnes in 1QFY22 while sales volume of refined sugar to the domestic retail market improved by 1.4% YoY. Export sales volumes edged up 1.7% YoY to 60,000 tonnes in 1QFY22.

• Average selling price of refined sugar in the domestic market increased by 10.4% YoY to RM2,626/tonne in 1QFY22 as MSM passed on some of the higher cost raw sugar to industrial customers.

Source: AmInvest Research - 30 May 2022