Investment Highlights

• Maintain HOLD on MSM Malaysia with an unchanged fair value of RM4.30/share. Our fair value implies an FY18F PE of 20x. We are maintaining MSM's FY18F earnings forecast for now. The group is expected to swing into the black in FY18F due to a fall in the cost of raw sugar and a stronger MYR vs. USD.

• MSM's FY17 results were within our expectations but below consensus estimates. MSM's net profit improved QoQ in 4QFY17 underpinned by higher trading gains and a lower effective tax rate. Trading gains amounted to RM17.9mil in 4QFY17 compared with RM12.9mil in 3QFY17. Trading gains were RM55.6mil in FY17 vs. RM38.0mil in FY16.

• MSM's net profit rose from RM10.4mil in 3QFY17 to RM13.1mil in 4QFY17. The group recorded net losses of RM21.5mil in 2QFY17 and RM34.6mil in 1QFY17 due to an increase in the cost of raw sugar.

• Although MSM's results were within our forecast, we find the group's 4QFY17 results to be disappointing. We thought that MSM would perform better in 4QFY17 due to the drop in global raw sugar prices. Instead, cost of sales rose by 2.3% QoQ to RM606.7mil in 4QFY17. Gross profit margin slid from 11.3% in 3QFY17 to 7.5% in 4QFY17.

• We are unsure if the erosion in gross profit margin in 4QFY17 is due to a large expense or an increase in the cost of raw sugar. Assuming there is no exceptionally high expense, the rise in the cost of raw sugar would be the opposite of the downward trend of global raw sugar prices.

• Previously, MSM said that its average exchange rate realised would be US$1.00: RM4.20 in 4QFY17. Based on this exchange rate, we estimate MSM's cost of raw sugar to be US$0.22/pound to US$0.23/pound in 4QFY17 vs. US$0.2269/pound in 3QFY17 (assuming there is no large expense in cost of sales). In contrast according to Bloomberg, the average price of raw sugar was US$0.14534/pound in 4QFY17.

• Comparing FY17 against FY16, we estimate that MSM's average cost of raw sugar climbed from US$0.20/pound to US$0.23/pound. Average exchange rate realised was about US$1.00: RM4.3245 in FY17 against US$1.00:RM4.18 in FY16.

• Demand for refined sugar was unexciting in FY17. Sales volume of refined sugar (excluding molasses) inched down by 3% to 997,000 tonnes in FY17. We believe that demand was affected by customers switching to imported sugar. In 2HFY17, three customers received Approved Permits (AP), which allow them to import about 40,000 to 50,000 tonnes of refined sugar. Sales volume to the industrial customers shrank by 4.0% in FY17 while sales volume to the retail distributors slid by 3.3%. Export sales were 0.7% marginally higher in FY17.

Source: AmInvest Research - 22 Feb 2018