-  Maintain HOLD on MSM Malaysia Holdings Bhd with an unchanged fair value of RM5.45/share. Our fair value implies an FY15F PE of roughly 16.5x.

-  Although MSM’s annualised 1HFY14 net profit was above our expectations and consensus estimates, we are keeping our earnings forecast as MSM’s quarterly profits tend to be lumpy.

-  Also as raw sugar prices have declined, we reckon that selling price of refined sugar to the overseas customers would have to follow suit. This would result in a squeeze in operating margin.

-  After a weak 1QFY14, MSM’s core net earnings rebounded by 99.0% in 2QFY14 underpinned by recoveries in gross profit margin and demand.

-  Comparing 2QFY14 against 1QFY14, MSM’s gross profit margin improved from 17.2% to 24.9%. We believe that this was due to higher raw sugar prices, which allowed the group to increase selling price of refined sugar.

-  According to Bloomberg, average price of raw sugar fell 8.6% from US$0.1939/pound in 1HFY13 to US$0.1773/pound in 1HFY14. On a QoQ basis, raw sugar price rose 5.4% from US$0.1726/pound in 1QFY14 to US$0.1819/pound in 2QFY14.

-  We believe that sugar consumption recovered in 2QFY14 ahead of the Hari Raya period in July. Overall, we estimate that MSM’s sales volume had improved by 24.2% QoQ in 2QFY14. This was driven mainly by the domestic market, which recorded a 29.1% expansion in demand.

-  On a YoY basis, we believe that sales volume inched up 1.1% in 1HFY14 supported by the manufacturing industries.

-  Sales volume to the domestic distributors fell by 7.4% YoY in 1HFY14 while sales volume to the local industries surged by 59.2%. Domestic distributors accounted for 52.6% of MSM’s sales volume in FY13. This was followed by the industries (24%) and export markets (20.9%).

-  Gross profit margin expanded from 20.5% in 1HFY13 to 21.3% in 1HFY14 on the back of higher selling price to the domestic distributors.

-  Offsetting this was the decline in selling price of refined sugar to the 16 industries in Malaysia due to competition from cheaper imported refined sugar.

Source: AmeSecurities