Investment Highlights

• We are downgrading MSM Malaysia from HOLD to SELL with a lower fair value of RM3.60/share (vs. RM4.30/share previously). Our fair value implies an FY19F PE of 25x. We have cut MSM’s FY18F net profit by 49.9% to account for weaker revenue and a lower-than-estimated gross profit margin.

• Going forward, there is risk that the government may lower the selling price of refined sugar for the domestic retail market to reduce the cost of goods and services. There is room for selling prices to decline as since the start of the year, the cost of raw sugar has dropped by 19.2% to about US$0.1215/pound.

• If the selling price of refined sugar for the retail market is lowered by 10 sen/kg, we estimate that MSM’s net profit would fall by 20%. Currently, the selling price of refined sugar is fixed at RM2.95/kg for “mom-and-pop” consumers. We have not factored in any reduction in the selling price for the retail market in MSM’s earnings forecast.

• MSM's net profit swung from -RM34.6mil in 1QFY17 to +RM15.8mil in 1QFY18. Even so, MSM's 1QFY18 results were below our expectations and consensus estimates. Included in MSM's 1QFY18 net profit were trading losses of RM3mil vs. gains of RM20.6mil in 1QFY17.

• We are disappointed with the group’s earnings. We expected MSM to perform better in 1QFY18 as the cost of raw sugar has dropped by almost 20% and the MYR has appreciated by 13.3% against the USD. Raw sugar accounted for 88% of production cost in FY17. Raw sugar is imported in USD.

• Working backwards, we estimate MSM’s average cost of raw sugar realised to be US$0.196/pound in 1QFY18 compared with US$0.22/pound in 1QFY17. Management said that its average cost of raw sugar was US$0.15/pound in 1QFY18. Average exchange rate realised given by MSM was US$1.00: RM4.00 in 1QFY18 vs. US$1.00: RM4.45 in 1QFY17.

• Demand for refined sugar was weak in 1QFY18. Total sales volume of refined sugar (ex-molasses) declined by 7.1% YoY to 222,000 tonnes in 1QFY18 due to competition from smuggled sugar from Thailand.

• Sales volume of refined sugar to the domestic retail market fell by 6.1% YoY in 1QFY18 while sales volume to the industrial customers rose by 2.2%. Export sales volume slid by 37.5% YoY to 20,000 tonnes in 1QFY18.

• Although MSM's net gearing was relatively unchanged at 47.9%, gross cash fell from RM170.5mil as at end-December 2017 to RM87.6mil as at end-March 2018. This was partly due to the repayment of a loan due to a related company. Loan due to a related company dropped from RM108.8mil as at endDecember 2017 to RM30.0mil as at end-March 2018.

Source: AmInvest Research - 24 May 2018