- Maintain HOLD on MSM Malaysia with an unchanged fair value of RM5.30/share. Our fair value of RM5.30/share implies an FY16F PE of 14x. MSM is currently trading at FY15F PE of 11.8x and FY16F PE of 12.7x.

- MSM’s 9MFY15 results were within consensus estimates and our expectations. MSM has declared a gross DPS of 12 sen in 3QFY15. We have assumed a gross DPS of 25 sen for FY15F (FY14: 24 sen), which implies a decent yield of 5.2%.

- MSM’s sales revenue shrank by 7.1% QoQ to RM546.5mil in 3QFY15 after the pre-festive buying in 2QFY15. AIso, MSM’s gross profit margin weakened from 25.5% in 2QFY15 to 18.6% in 3QFY15. We attribute this to a 10.8% appreciation in the USD against the RM, which increased the cost of importing raw sugar.

- Comparing 9MFY15 against 9MFY14, MSM’s gross profit margin improved from 19.2% to 22.5% underpinned by a lower cost of raw sugar.

- According to Bloomberg, the average price of raw sugar was US$0.1409/pound in 9MFY15, which was 25.8% lower than the average price of US$0.1900/pound recorded in 9MFY14. On a quarterly basis, the average price of raw sugar inched down by 3.4% from US$0.1284/pound to US$0.1240/pound.

- Sales volume of refined sugar rose by 3.0% YoY in 9MFY15, but slid by 4.7% QoQ in 3QFY15. The YoY growth in sales volume was driven mainly by the domestic market, which recorded an 11.7% improvement in 9MFY15. This helped compensate for a 20.5% YoY fall in the sales volume of refined sugar to overseas customers.

- In the domestic market, we believe that some distributors were reclassified as industrial customers. As a result, MSM recorded a 44.1% YoY surge in sales volume of refined sugar to the industrial customers in 9MFY15 but at the same time, sales volume of sugar to the domestic distributors fell by 17.0%.

- Average selling price of refined sugar to the industrial customers was flat YoY in 9MFY15 as MSM passed on savings from the lower cost of raw sugar to the customers. Also, MSM’s selling price had to be competitive against imported refined sugar, which was cheaper.

- MSM’s balance sheet is clean. Net gearing stood at 3.8% as at end-September 2015 versus 5.4% as at end-June 2015. MSM’s net debt declined to RM77.4mil as at end- September 2015 from RM108.7mil as at end-June 2015. Going forward however, MSM’s net gearing is expected to increase due to the construction of a US$259mil sugar refinery in Johor. The refinery’s ground-breaking ceremony is expected to take place in early-FY16F.

Source: AmeSecurities Research - 26 Nov 2015