Investment Highlights

• Maintain HOLD on MSM Malaysia with an unchanged fair value of RM4.00/share. Our fair value implies an FY18F PE of 25x. Going forward, MSM is expected to benefit from the recent appreciation of the MYR against USD as raw sugar is imported in USD.

• MSM's 9MFY17 results were above our expectations but below consensus estimates. We have reduced our forecast of MSM's net loss for FY17F from RM34.7mil to RM27.6mil on the back of a lower cost of raw sugar. MSM's net profit is expected to improve further in 4QFY17 underpinned by a fall in the cost of raw sugar.

• After recording a net loss of RM56.1mil in 1HFY17, MSM swung into a small net profit of RM10.4mil in 3QFY17. Gross profit margin rose from 2.9% in 2QFY17 to 11.3% in 3QFY17. The improvement in earnings was driven by a decline in the cost of raw sugar imports.

• Average cost of raw sugar realised was about US$0.2269/pound in 3QFY17 vs. US$0.249/pound in 2QFY17. Average exchange rate realised was US$1.00: RM4.27 in 3QFY17 against US$1.00: RM4.38 in 2QFY17.

• Demand for refined sugar was tepid. Three customers received Approved Permits (AP), which allow them to import refined sugar instead of buying from the local players. The APs allow these companies to import about 40,000 to 50,000 tonnes of refined sugar in FY17F.

• As such, it was not surprising that MSM's sales volume to the industrial customers slid by 2.3% YoY in 9MFY17. Industrial customers accounted for 38.9% of the sales volume in the domestic market.

• Sales volume to the retail distributors were marginally higher by 0.6% YoY in 9MFY17 while export volumes shrank by 3.6% YoY in 9MFY17. Overall, sales volume (excluding molasses) of MSM's sugar products declined by 1.2% YoY in 9MFY17.

• MSM recorded trading gains of RM12.9mil in 3QFY17 vs. RM4.1mil in 2QFY17 and RM20.6mil in 1QFY17. Trading gains amounted to RM37.7mil in 9MFY17 against RM103.1mil in 9MFY16.

• MSM's net debt increased from RM879.5mil as at end-June to RM890.1mil as at end-September 2017. Capex surged from RM201.4mil in 9MFY16 to RM543.6mil in 9MFY17 mainly dueto the construction of the US$259mil sugar refinery in Johor. The new sugar refinery is expected to be completed in 1QFY18.

Source: AmInvest Research - 23 Nov 2017