- Maintain HOLD on MSM Malaysia Holdings Bhd, with a higher fair value of RM5.45/share. Our fair value implies a FY14F PE of roughly 14x.

- MSM’s annualised 1HFY13 core net profit was above our expectations and consensus estimates.

- We have revised MSM’s FY13F net profit forecast upwards by 17% to account for the better-than-expected gross profit margin.

- MSM benefited from the fall in raw sugar prices and the appreciation of the Ringgit in 1HFY13.

- Going forward, the depreciation of the Ringgit could affect MSM’s operating margins unless MSM had locked-in the exchange rate when the US$ was low against the Ringgit in 1HFY13.

- Since end-June 2013, the Ringgit has weakened by 4.7% against the US$. Presently, the exchange rate is US$1.00/RM3.3095, 7.6% lower than the rate of US$1.00/RM3.058 at the start of the year.

- A silver lining is raw sugar prices, which are still in the doldrums. Since reaching a low of US$0.16/pound on 16 July 2013, price of raw sugar has only inched up 1.8% to US$0.1628/pound currently.

- Gross profit margin improved from 18.1% in 1HFY12 to 20.5% in 1HFY13. According to Bloomberg, price of raw sugar slid 20.1% from US$0.2282/pound in 1HFY12 to US$0.1823/pound in 1HFY13.

- MSM’s turnover edged up by 3.9% YoY to RM1.1bil in 1HFY13 driven by higher selling price. Selling price of refined sugar rose 20 sen/kg to RM2.50/kg from September 2012 onwards.

- We estimate that sales volume of refined sugar fell by more than 4% YoY in 1HFY13.

- Demand for refined sugar remained soft in 1HFY13 as industrial players continued to buy imported sugar. About 30% of MSM’s domestic customers are industrial companies.

- 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