Investment Highlights

• We are keeping our SELL recommendation on MSM Malaysia with a lower fair value of RM3.27/share. Our fair value implies an FY19F PE of 25x. MSM’s 1HFY18 results were below our expectations and consensus estimates. We have cut MSM’s net profit by 20.9% for FY18F and 8.5% for FY19F to account for a higher cost of sales.

• MSM’s net profit declined by 9.3% QoQ to RM14.3mil in 2QFY18 due to an erosion in gross profit margin, an increase in the effective tax rate and higher selling and distribution expenses. Gross profit margin shrank from 12.6% in 1QFY18 to 10.5% in 2QFY18.

• We estimate MSM’s cost of raw sugar to be US$0.199/pound in 2QFY18 vs. US$0.196/pound in 1QFY18. Management said that its cost of raw sugar was US$0.14- 0.16/pound in 2QFY18 and US$0.15/pound in 1QFY18. MSM’s selling and distribution expenses increased by 8.3% QoQ to RM22.5mil in 2QFY18.

• Revenue grew by 4.4% QoQ to RM573.2mil as sales volume of refined sugar (ex-molasses) rose by 7.7%. The higher demand was supported by the Hari Raya festive period in June. As a result, sales volume of sugar to the retail market improved by 5.6% QoQ to 114,000 tonnes in 2QFY18.

• Comparing 1HFY18 against 1HFY17, MSM swung from a net loss of RM56.1mil in 1HFY17 to a net profit of RM30.1mil in 1HFY18 underpinned by a cheaper cost of raw sugar.

• We estimate MSM’s cost of raw sugar to be US$0.196/pound in 1HFY18 against US$0.218/pound in 1HFY17. Management said that its cost of raw sugar was US$0.14-0.16/pound in 1HFY18 vs. US$0.18-0.20/pound in 1HFY17. Also, MSM said that its average USD/MYR rate realised was US$1.00: RM3.98 in 1HFY18 against US$1.00: RM4.4150 in 1HFY17.

• Demand for refined sugar was weak in 1HFY18. Total sales volume of refined sugar (ex-molasses) declined by 6.9% YoY to 462,000 tonnes in 1HFY18 due to competition from smuggled sugar from Thailand and imported sugar. Companies with approved permits (AP) are allowed to import refined sugar from overseas. We understand that the government has stopped issuing APs. The government has also cancelled the existing APs. Hence, demand for sugar is expected to improve in 2HFY18.

• Sales volume of refined sugar to the domestic retail market fell by 4.7% YoY in 1HFY18 while sales volume to the industrial customers shrank by 3.6%. Export sales volume slumped by 23.9% YoY to 51,000 tonnes in 1HFY18.

Source: AmInvest Research - 27 Aug 2018