• The Edge Financial Daily reported that Central Sugar Refinery (CSR) will be reducing the price of brown sugar from RM4.25/kg to RM3.50/kg from 1 August 2018 onwards.

• Central Sugar’s CEO said that the company aims to get consumers to switch from white sugar to brown sugar. The CEO added that brown sugar is better because it tastes better and it is healthier.

• Also, Central Sugar will be embarking on a new rebranding initiative, which will see a change in the packaging, distribution and dissemination of information on the benefits of brown sugar via social media. Central Sugar is owned by Tradewinds Group.

• We believe that MSM Malaysia will follow suit and lower the selling price of its brown sugar products.

• We do not expect MSM’s earnings to be significantly affected as the sales volume of brown sugar products is not high. We think that brown sugar accounts for less than 10% of MSM’s sales volume.

• We believe that the selling price of brown sugar is not the main concern. Instead, we think that the sugar refiners in Malaysia are facing three major issues currently.

• First, there is risk that the government may open up the market to sugar imports as the sugar industry is dominated by only two players. We do not think that would be a third sugar refiner as the Malaysian market is too small.

• Second, there is risk that the government may reduce the selling price of white sugar for the retail market as the cost of raw sugar has been falling. We estimate that if the selling price of white sugar for the retail market drops by 10 sen/kg, MSM’s net profit would fall by more than 10%. The selling price of white sugar for the “mom-and-pop” customers is currently fixed at RM2.95/kg. Sales volume of sugar sold to the retail market accounted for 48.6% of total sales volume in 1QFY18.

• Third, the sugar industry in Malaysia is facing an oversupply. Domestic consumption of white sugar in Malaysia is about 1.5mil tonnes per year compared with the current capacity of three million tonnes per year. MSM’s sugar refinery in Tanjung Langsat, which is supposed to start operations anytime soon, has an annual capacity of one million tonnes.

• MSM’s market share of sales volume of sugar in Malaysia was 58% in 2017 while Central Sugar’s market share was 42%.

• Maintain SELL on MSM with a fair value of RM3.60/share.

Source: AmInvest Research - 17 Jul 2018