- Maintain HOLD on MSM Malaysia Holdings Bhd, with an unchanged fair value of RM5.25/share. Our fair value implies a FY14F PE of roughly 15x.

- MSM’s annualised 1QFY13 net profit was above our expectations but in line with consensus estimates. In spite of this, we are keeping MSM’s FY13F earnings forecast for now.

- Although MSM reported lower-than-expected turnover, the group’s results exceeded our forecast due to a recovery in gross profit margins.

- After being hit by the high cost of raw sugar locked-in under the long-term contract last year, MSM is finally enjoying the benefits of the fall in raw sugar prices in the global markets.

- Gross profit margin inched up from 14.9% in 4QFY12 to 19.1% in 1QFY13. According to Bloomberg, price of raw sugar slid 21.1% from US$0.2362/pound in 1QFY12 to US$0.1864/pound in 1QFY13.

- Going forward, MSM’s margins are expected to be supported by a strong Ringgit, which would result in lower cost of importing raw sugar. Comparing 1QFY13 against 1QFY12, the Ringgit was relatively unchanged. On average, the Ringgit depreciated from US$1.00:RM3.0616 in 1QFY12 to US$1.00:RM3.0814 in 1QFY13.

- MSM’s turnover shrank 3.2% YoY to RM515mil in 1QFY13 due to lower domestic sales. We estimate that sales volume of refined sugar fell by more than 6% YoY in 1QFY13.

- The slide in sales volume was partly mitigated by an increase in selling prices. Recall that selling price of refined domestic sugar was increased by 20 sen/kg to RM2.50/kg under the Budget 2013 in September 2012.

- Since last year, MSM has been suffering from a decline in the sales volume of refined sugar to the industrial players. About 30% of MSM’s domestic customers come from the industrial segment.

- These industrial companies have been switching to cheap imports of refined sugar instead of buying them locally.

- Going forward, MSM would be focusing more on the export markets to mitigate soft domestic consumption of refined sugar. The export market segment is estimated to account for 17% of MSM’s volume of production in FY13F.

Source: AmeSecurities