• The Edge Malaysia weekly reported that Tan Sri Syed Mokhtar has proposed a formation of a special purpose vehicle (SPV), where MSM Malaysia and Tan Sri Syed Mokhtar's sugar assets will be injected into. The special purpose vehicle will be run by Syed Mokhtar.

• MSM's market share of the sugar industry in Malaysia was 60% in 2016 while Central Sugar's market share is the remaining 40%.

• FGV officials are currently evaluating the proposal. The Edge Malaysia said that while FGV appears to be willing to part ways with the sugar business, Syed Mokhtar's plan falls short. However, there were no details on the shortcomings of his proposals.

• Central Sugar, which is owned by Syed Mokhtar, was reported to have recorded a net profit of RM98.1mil on the back of a turnover of RM1.4bil in FY16. In comparison, MSM's net profit was RM120.7mil on the back of revenues of RM2.7bil in FY16.

• It is not known how much Central Sugar's net profit was in FY17. MSM recorded a net loss of RM32.6mil in FY17 as it was hit by a high cost of raw sugar in 1HFY17.

• Whether or not the proposal is beneficial to FGV depends on the valuation or pricing for MSM Malaysia. Also as MSM is listed, we are unsure if it has to be privatised first before being injected into the special purpose vehicle or whether MSM will be sold directly to the special purpose vehicle and hence, all shareholders in MSM would be offered shares in the special purpose vehicle.

• It is uncertain if the special purpose vehicle has reserves to make a cash offer for MSM.

• MSM's market capitalisation is RM2.5bil currently, which implies an FY18F PE of 16.7x and FY19F PE of 16.2x. We have a fair value of RM4.30/share for MSM, which is based on an FY18F PE of 20x. MSM was listed in 2011 at an institutional IPO price of RM3.50/share and retail IPO price of RM3.38/share.

• If FGV were to hold shares in the special purpose vehicle as consideration for the disposal of MSM Malaysia, we reckon that the special purpose vehicle would be an associate or joint venture. However, the earnings base would be larger as it would hold Central Sugar and MSM. We think that Syed Mokhtar would hold a controlling stake in the special purpose vehicle.

• At the peak of MSM's earnings in FY15, it accounted for 68.9% of FGV's pre-tax profit. in FY17, MSM only accounted for 0.5% of FGV's pre-tax earnings.

• We expect MSM to swing into a net profit of RM151.1mil in FY18F vs. a net loss of RM32.6mil in FY17 due to a drop in the cost of raw sugar. Risk is the new sugar refinery in Tanjung Langsat, which is targeted for commissioning in 2HFY18. There is risk that MSM may not be able to find enough off-takers for the new sugar refinery, which has a production capacity of one million tonnes per year.

• Maintain HOLD on MSM Malaysia with a fair value of RM4.30/share. MSM is 51%-owned by FGV. Koperasi Permodalan Felda holds another 15.3% of MSM Malaysia.

Source: AmInvest Research - 19 Mar 2018