Investment Highlights

• Maintain HOLD on MSM Malaysia with an unchanged fair value of RM4.00/share, which implies a FY18F PE of 25x. MSM is currently trading at FY17F PE of 214.1x and FY18F PE of 24.5x. MSM's FY17F dividend yield is forecast at 1.3%. We have revised MSM's FY17F gross DPS from 16 to 5 sen.

• We have slashed MSM's FY17F net profit to account for higher production costs. Although MSM's 1HFY17 results were poor, we are keeping our HOLD recommendation as the group is anticipated to benefit from the recent plunge in raw sugar prices. MSM is expected to swing into the black in 2HFY17. Raw sugar accounts for more than 80% of MSM's production costs.

• MSM's 1HFY17 results were below consensus estimates and our earnings forecast. The group continued to be in the red in 2QFY17. MSM recorded a smaller net loss of RM21.5mil in 2QFY17 vs. RM34.6mil in 1QFY17. This is in spite of a 6.7% QoQ increase in revenue in 2QFY17.

• MSM's losses were attributed to the higher cost of raw sugar. Although raw sugar prices fell in 2QFY17, MSM were stuck with inventory purchased at higher price. Average cost of raw sugar realised was RM2,400/tonne in 2QFY17 vs. RM2,200 to RM2,300/tonne in 1QFY17. Average exchange rate realised was US$1.00: RM4.378 in 2QFY17 compared with US$1.00:RM4.45 in 1QFY17. Raw sugar is imported in USD.

• Comparing 1HFY17 against 1HFY16, average cost of raw sugar realised rose by 46.9% from RM1,600/tonne to a range of RM2,300/tonne to RM2,400/tonne. As a result, MSM's gross profit margin shrank from 16.0% in 1HFY16 to 1.7% in 1HFY17.

• Sales volume of MSM's refined sugar products (excluding molasses) inched down by 2.2% YoY in 1HFY17. Sales of refined sugar to the domestic market edged up by 0.7%, which compensated for a 17.3% decline in exports. Domestic market accounted for 86.5% of sales volume in 1HFY17. Within the domestic market, retail distributors accounted for 54.5% of sales volume in 1HFY17.

• MSM recorded trading gains of RM4.1mil in 2QFY17 against RM20.6mil in 1QFY17. Trading gains amounted to RM24.8mil in 1HFY17 compared with RM24.8mil in 1HFY16.

• MSM's net debt increased from RM560mil as at end-March to RM879.5mil as at end-June 2017. Capex climbed from RM73.4mil in 1HFY16 to RM447.7mil in 1HFY17 mainly due to the construction of the US$259mil sugar refinery in Johor. The new sugar refinery is expected to be completed in 1HFY18.

Source: AmInvest Research - 30 Aug 2017