Investment Highlights

• We downgrade MSM Malaysia to SELL from HOLD with a lower fair value of RM0.77/share vs. RM0.90/share previously. Our fair value for MSM is based on a FY23F PE of 15x and an unchanged 3-star ESG rating.

• We reduce MSM’s FY23F net profit by 14.5% to account for higher costs of production as MSM’s 1HFY22 net loss was larger than our forecast due to higher-than-expected production costs. We have increased MSM’s FY22E net loss to RM107.5mil from RM92.9mil to account for this.

• MSM’s results also fell short of consensus estimates. The group reported a net loss of RM61.7mil in 1HFY22. In comparison, consensus had expected a net profit of RM3.6mil for FY22E.

• Included in MSM’s net loss of RM61.7mil in 1HFY22 were realised gains on Brent crude oil options contracts of RM4.8mil, unrealised gains on Brent crude oil option contracts of RM0.7mil and unrealised losses on sugar futures contracts of RM0.8mil.

• MSM was hit by higher costs of raw sugar, freight and gas in 1HFY22. Also, MSM’s sugar refinery in Johor experienced a shutdown in 1QFY22, which affected production volumes. Average utilisation rate in Johor was 20% in 2QFY22.

• We estimate MSM’s raw sugar to be 22.5 US cents/pound in 1HFY22 vs. 18.4 US cents/pound in 1HFY21 (including costs of transportation and insurance). In addition, the RM was weaker against the USD in 1HFY22, which raised the cost of raw sugar imports. Average exchange rate realised was US$1.00: RM4.34 in 1HFY22 compared with US$1.00: RM4.07 in 1HFY21.

• Sales volume of refined sugar inched down 0.6% YoY in 1HFY22 due to lower demand from the retail segment. Breaking it down, sales volume of refined sugar to the industrial segment improved by 1.6% YoY to 195,000 tonnes in 1HFY22. However, the retail segment bought 2.9% less sugar. Export volumes increased by 8.8% YoY to 111,000 tonnes in 1HFY22.

• Average selling price of refined sugar in the domestic market (industrial and retail) rose by 9.1% YoY to RM2,628/tonne in 1HFY22. Average selling price of refined sugar to industrial customers went up by 13.4% YoY to RM2,641/tonne in 1HFY22 while wholesalers in the retail segment had to pay 4.5% more.

Source: AmInvest Research - 23 Aug 2022