Investment Highlights

• Maintain HOLD on MSM Malaysia with an unchanged fair value of RM4.00/share, which is based on a FY18F PE of 25x. MSM is currently trading at FY18F PE of 24.9x and FY19F PE of 23.6x.

• We believe that MSM would be able to pay dividends in spite of its poor earnings performance in FY17F. Hence, we have forecast a small gross DPS of 3 sen for FY17F. Gross DPS is forecast to be higher at 8 sen in FY18F in line with the earnings recovery.

• We have left MSM's FY18F net profit unchanged. However for FY17F, we are now forecasting a net loss of RM34.7mil vs. a net profit of RM12.8mil previously. We have assumed that the group would only return to the black in 4QFY17 instead of 3QFY17. We reckon that 3QFY17 would still be challenging due to the high cost of raw sugar inventory.

• We visited MSM's sugar refinery in Prai recently. The site visit affirmed that operating conditions are improving.

• FY17F is expected to be a washed-out year for MSM. However for FY18F, we expect MSM to swing back into profitability on the back of a fall in raw sugar costs. Raw sugar accounts for almost 80% of MSM's production costs.

• MSM has locked in raw sugar supply for the domestic market for 1HFY18 at undisclosed prices. We believe that the cost of raw sugar locked in would be 20% to 30% lower than 1HFY17. We think that the average cost of locked-in raw sugar is a few US cents above the spot prices.

• According to Bloomberg, average raw sugar price was US$0.14635/pound in 3QFY17. In comparison, MSM's average cost of raw sugar realised was estimated at US$0.241/pound in 1HFY17 and US$0.1715/pound in 1HFY16.

• MSM has only locked in the USD for the next three months. The group only secures the USD to pay its raw sugar requirements when the vessels of raw sugar are scheduled to arrive. This is normally three months ahead. So far this year, the MYR has appreciated against the USD. Since touching a high of RM4.4975 in January 2017, the USD has declined by 5.9%. Raw sugar is imported in USD.

• In terms of demand, we have assumed that MSM's sales volume would improve by 5.7% in FY18F compared with a decline of 3.1% in FY17F. Volume growth in FY18F is expected to be driven mainly by export sales from the new sugar refinery in Tanjung Langsat, Johor.

Source: AmInvest Research - 13 Oct 2017