- Maintain BUY on MSM Malaysia with an unchanged fair value of RM5.70/share. Our fair value of RM5.70/share implies an FY16F PE of 14.7x.

- MSM’s 1QFY15 results were within consensus estimates and our expectations. The group’s net profit climbed by 26.1% YoY to RM71mil in 1QFY15 as revenue inched up by 2.1%. Comparing 1QFY15 against 4QFY14, MSM’s net profit shrank by 5.3% as turnover fell by 19% to RM508.5mil.

- MSM benefited from a lower cost of raw sugar in 1QFY15. As a result, the group’s gross profit margin improved from 17.2% in 1QFY14 to 23.3% in 1QFY15.

- According to Bloomberg, average raw sugar price declined by 19.3% from US$0.1785/pound in 1QFY14 to US$0.1441/pound in 1QFY15.

- Previously, about 57% of MSM’s raw sugar requirements were supplied under the long-term contract (LTC), which was more expensive. Raw sugar locked-in under the LTC was US$0.26/pound versus the current price of US$0.12/pound to US$0.13/pound. The LTC expired at end- FY14.

- MSM’s revenue improved by 2.1% YoY to RM508.5mil in 1QFY15 as a 5.9% rise in sales volume helped compensate for lower selling prices.

- The expansion in sales volume in 1QFY15 was driven mainly by industrial customers. Industrial customers overtook domestic distributors as MSM’s largest customer segment in 1QFY15.

- Domestic distributors accounted for 39.0% of total sales volume in 1QFY15 while industrial customers accounted for an additional 45%. Export markets accounted for the balance 16% of MSM’s sales volume in 1QFY15.

- Sales volume of MSM’s refined sugar to industrial customers surged by an estimated 46.5% YoY in 1QFY15. Sales volume of refined sugar exports declined by 7.9% YoY in 1QFY15 while sales volume of refined sugar to domestic distributors fell by 15.9%.

- Average selling price of refined sugar to domestic and industrial customers eased by 2.2% YoY each in 1QFY15. Interestingly, average selling price of exported refined sugar climbed by 5.8%.

- MSM’s balance sheet is healthy. MSM was in a net cash position of RM147.8mil as at end-March 2015 compared with RM221.6mil as at end-December 2014. The decline in net cash is due to the payment of RM86mil for the land in Johor, which will house the new refinery.

Source: AmeSecurities Research - 28 May 2015