Investment Highlights

• Maintain HOLD on MSM Malaysia with a higher fair value of RM4.30/share vs. RM4.00/share originally. Our fair value implies an FY18F PE of 20x vs. 25x previously.

• We have lowered our PE assumption for MSM due to uncertainties arising from the new sugar refinery in Johor. There is risk that the new sugar refinery may perform below expectations.

• Hence, we are unexcited over MSM in spite of the upward earnings revision and profit turnaround in FY18F. We have raised MSM's FY18F net profit by 34.1% due to a lower cost of raw sugar. We are now assuming an average raw sugar price of US$0.175/pound for FY18F compared with US$0.185/pound originally. MSM is also a beneficiary of the strong MYR as raw sugar is imported in USD.

• We believe that MSM would perform well in 1HFY18 underpinned by a drop in the cost of raw sugar imports.

• However in 2HFY18, the group may be dragged by losses from the new sugar refinery in Tanjung Langsat, Johor. Also, MSM would be recognising higher depreciation and interest expenses for the new sugar refinery. At the same time, there is risk that MSM would not be able to find enough customers for the new sugar refinery in FY18F and FY19F.

• The annual production capacity of the new sugar refinery in Johor is one million tonnes, which is expected to cater mainly to the overseas markets. As a gauge, MSM's export volumes are currently less than 200,000 tonnes per year.

• Selling domestically is not viable due to the limited size of the market. The sugar consumption market in Malaysia is about 1.4mil tonnes per year, which is sufficiently supplied by Tradewinds Group (estimated capacity: 850,000 tonnes per year) and MSM's refineries in Prai and Perlis (total capacity: 1.25mil tonnes per year).

• We believe that it would be challenging for MSM to source off-takers for the new sugar refinery in Johor. As such, we estimate MSM's average utilisation rates to be 46% in FY18F and 48% in FY19F. Also, we think that MSM's interest expense will triple in FY19F from FY16's level while depreciation expense will climb by 66%. MSM's sugar refinery in Johor costs about US$259mil (RM1.1bil) in total.

Source: AmInvest Research - 2 Feb 2018