Investment Highlights

• Maintain HOLD on MSM Malaysia with a lower fair value of RM4.65/share, which implies a FY18F PE of 20x. MSM is currently trading at FY17F PE of 26.3x and FY18F PE of 18.4x. MSM's FY18F dividend yield is forecast at 3.7%.

• MSM's results were weaker than expected. The group recorded a net loss of RM34.6mil in 1QFY17. Stripping out trading gains of RM20.6mil, the net loss would have been larger at RM60.5mil in 1QFY17. We have reduced MSM's FY17F net profit by 29.7% due to the poor performance in 1QFY17.

• We expect MSM's performance to improve in the coming few quarters underpinned by the recent fall in raw sugar prices and hike in selling price of refined sugar, which took place in March 2017. We understand that MSM would be profitable in 2QFY17.

• MSM recorded a trading gain of RM20.6mil in 1QFY17 compared with a loss of RM65.2mil in 4QFY16 and a gain of RM40mil in 1QFY16. The group's trading gain amounted to RM38mil in FY16.

• MSM was hit by higher cost of raw sugar imports in 1QFY17. Gross profit margin was 0.5% in 1QFY17 vs. 18.7% in 1QFY16. MSM eked out a small gross profit of RM3.1mil in 1QFY17.

• Average cost of raw sugar realised was US$0.21/pound in 1QFY17, 6.1% higher than the US$0.1735/pound recorded in 1QFY16. Average exchange rate realised was US$1.00:RM4.45 in 1QFY17 vs. US$1.00: RM4.30 in 1QFY16.

• Sales volume of MSM's refined sugar products (excluding molasses) inched up by 0.7% YoY in 1QFY17. Sales of refined sugar to the domestic market rose by 6.8%, which offset a 26.9% fall in exports.

• Within the domestic market, sales volume of refined sugar to the wholesalers expanded by 18.5% while sales volume of sugar to the industrial customers slid by 5.0% YoY in 1QFY17. Wholesalers made up 48.3% of sales volume in 1QFY17.

• MSM's net debt increased from RM197.3mil as at endDecember 2016 to RM560mil as at end-March 2017. Capex rose from RM26.9mil in 1QFY16 to RM152.7mil in 1QFY17 mainly due to the construction of the US$259mil sugar refinery in Johor. The new sugar refinery is expected to be completed in 1QFY18.

Source: AmInvest Research - 1 Jun 2017