• Gas Malaysia has set the average effective tariff at RM32.69/MMBTU for the non-power sector for the period of 1 July to 31 December 2018.

• The average effective tariff was RM32.52/MMBTU for the period of 1 January to 30 June 2018.

• We do not expect MSM Malaysia to be significantly affected as the increase in gas tariff is small.

• In addition, energy accounts for only 4% of MSM’s production costs. Raw sugar is the largest cost component, accounting for 88% of MSM’s production costs in FY17.

• We forecast MSM’s gross profit margin to improve from 5.5% in FY17 to 14.2% in FY18F on the back of a drop in raw sugar costs.

• According to Bloomberg, price of raw sugar fell by 28.4% from an average of US$0.1879/pound in 1QFY17 to US$0.1346/pound in 1QFY18. Also, the MYR has appreciated by 13.3% against the USD from US$1.00: RM4.4469 in 1QFY17 to US$1.00: RM3.9241 in 1QFY18. Raw sugar is imported in USD.

• MSM’s new sugar refinery in Tanjung Langsat, Johor is expected to be completed anytime soon. The sugar refinery, which commands an annual production capacity of one million tonnes, is targeted to commence operations at the end of June 2018.

• We do not expect the new sugar refinery to be profitable in FY18F as utilisation rate is envisaged to be low at 30%.

• There is risk that the sugar refinery may not be able to find enough off-takers for its products. In 1QFY18, MSM’s sales volume declined by 7.1% YoY due to competition from smuggled and imported sugar.

• Maintain SELL on MSM Malaysia with an unchanged fair value of RM3.60/share.

Source: AmInvest Research - 14 Jun 2018