- MSM Malaysia Holdings Bhd announced that it would be undertaking the construction of the sugar refinery in Tanjung Langsat, Johor without its joint venture partner, Al-Khaleej International. - MSM has decided to proceed with the project alone as it is “of national interest”.

- We are neutral on this development. With a joint venture partner, MSM would have been able to reduce its share of the construction cost of the sugar refinery.

- In addition if the sugar refinery was making losses in the beginning, MSM would have been able to limit its exposure. Alternatively if the sugar refinery was generating profits, MSM would gain more by consolidating its earnings. - We believe that MSM would be able to gear up to finance the construction cost of the sugar refinery in Tanjung Langsat, which would also include vessel and logistics terminals. The group does not need to undertake any cash call at the moment.

- However, there is a possibility that MSM’s dividend payments may be affected. The group’s dividend payouts have been exceeding the official policy of 50% of net profit in the past three years. MSM’s FY14 gross DPS is estimated at 24 sen, which implies a yield of 4.8% and net payout of 65.6%.

- As at end-December 2014, MSM was in a net cash position of RM221.6mil. MSM’s shareholders’ funds stood at RM1.9bil.

- We believe that the total cost of the sugar refinery in Tanjung Langsat would range between RM800mil and RM1bil. The sugar refinery is estimated to command a production capacity of one million tonnes annually.

- We reckon that the refinery would be producing sugar for the export markets. It is estimated that the proposed sugar refinery would be generating cost savings of 35%, which would allow MSM to compete with cheap refined sugar from Thailand. - We have not imputed any earnings contribution from the proposed sugar refinery into our earnings forecast yet. The sugar refinery is targeted for completion at the end of FY17F or beginning of FY18F. Maintain BUY on MSM.

Source: AmeSecurities