- Maintain HOLD on MSM Malaysia Holdings Bhd, with an unchanged fair value of RM5.45/share. Due to the downward revision in MSM’s FY13F earnings forecast, our fair value now implies a FY14F PE of roughly 15.5x.

- We have reduced our earnings forecast to account for lower gross profit margin in 2HFY13.

- MSM held an analyst briefing on its 1HFY13 results last week. We understand that the high gross profit margin of 20.5% in 1HFY13 would not be sustainable in 2HFY13.

- This is because MSM would be using more of the raw sugar sourced under the long-term contract (LTC) in 2HFY13 instead of buying them from the free market. The price of raw sugar locked in under the LTC was US$0.26/pound versus the spot price of US$0.16-US$0.17/pound in the global markets.

- In 1HFY13, about 70% of the raw sugar requirements came from the free market while only 30% were sourced under the LTC. This situation is expected to reverse in 2HFY13.

- We also gather that MSM had locked in most of its US$ requirements at favourable exchange rates for 2HFY13. Hence, the group may not be adversely affected by the depreciation of the Ringgit in 2HFY13.

- Sales volume of the group’s sugar products rose by 13.2% from 423,000 tonnes in 1HFY12 to 479,000 tonnes in 1HFY13. This was driven by the export markets segment, which enjoyed a 152.4% surge in sales volume from 42,000 tonnes in 1HFY12 to 106,000 tonnes in 1HFY13.

- Sales volume of sugar in the domestic market shrank by 7.1% YoY to 262,000 tonnes in 1HFY13 due to lower consumption. Demand from the local industrial customers inched up from 77,000 tonnes in 1HFY12 to 78,000 tonnes in 1HFY13.

- MSM is now selling at lower prices to customers in the local export market segment instead of following prices fixed by the Government. Hence, prices of refined sugar for customers in this segment might follow the trend of raw sugar prices in the future.

- We understand that MSM is doing this to help customers in this market segment compete globally. We gather that sugar refining is a volume-driven business rather than margin. Hence, it would be beneficial for MSM to improve its volume in the longer term by selling more to customers in the local export market segment.

- The customers in this segment are those who use refined sugar in their products, which are then exported.\

Source: AmeSecurities