- 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.

- MSM’s annualised 9MFY14 results were above our expectations but within consensus estimates. We had overestimated the decline in MSM’s gross profit margin. We have raised MSM’s FY14F EPS by 4.9% to adjust for this.

- MSM’s gross profit margin shrank from 21.6% in 9MFY13 to 19.5% in 9MFY14. On a quarterly basis, gross profit margin plunged from 24.9% in 2QFY14 to 16.0% in 3QFY14.

- MSM’s gross profit margin slid QoQ in 3QFY14 due to more usage of raw sugar sourced under the long-term contract (LTC). About 54% of the raw sugar used in 3QFY14 was from the LTC. MSM received three shipments of raw sugar sourced under the LTC in 3QFY14 versus one shipment in 3QFY13.

- We understand that MSM’s gross profit margin would improve in 4QFY14 as the group would only be receiving one shipment of raw sugar sourced under the LTC.

- Raw sugar sourced under the LTC cost about US$0.26/pound, which is more expensive than free market raw sugar of US$0.15/pound-US$0.16/pound currently.

- We understand that the number of companies allowed to import refined sugar has increased from 16 to 32. Management did not disclose how much these companies account for MSM’s sales volume.

- We believe that the increase in the number of import permits would affect the demand from the domestic industry segment. MSM will be submitting a proposal to abolish the import permit system to the Government.

- Sales volume of MSM’s refined sugar improved by an estimated 2.2% YoY in 9MFY14. This was mainly driven by the domestic market (local distributors and industries), which recorded a 5.5% increase in demand.

- Total sales volume shrank 9.1% QoQ in 3QFY14 as distributors had stocked up in 2QFY14 for the Hari Raya festivities in 3QFY14. Sales volume of refined sugar to the domestic market contracted by 11.2% while exports inched up by an estimated 1.4% QoQ in 3QFY14.

- We believe that MSM reduced the average selling price of refined sugar to the domestic industries and overseas customers in 9MFY14 due to competition from imported sugar. We estimate that average selling price of refined sugar to the domestic industries eased by 2.7% YoY in 9MFY14. Average selling price of exported refined sugar shrank by roughly 3.8%.

Source: AmeSecurities