• Overview. MSM Malaysia Holdings Berhad (MSM) 3Q22 revenue improved by 21.8% YoY and 7.0% QoQ thanks to higher blended ASP (11.7% YoY; 5.3%: QoQ) and higher sales volume (10%: YoY, 1.2%: QoQ) - Table 2. MSM’s bottom line which slipped to a net loss of RM73mn (>-800% YoY) was hit by higher cost of sales including raw material (NY11), freight, natural gas, and weakening of Ringgit. This was also added by higher cost of packing materials, salaries, and inland logistics during the period.

• Against estimates: Above. 9M22 net loss of RM135mn came in above our and consensusforecast or accounting 133.6% and 151% of our full year projection.

• Outlook. Continuous headwinds could hamper MSM form including (i) rising raw materials prices (NY11), (ii) production cost, (iii) natural gas, (iv) freight costs and (v) unfavourable forex movement which may harm the bottom line though this is expected to improve in 2H23. However, we anticipate the post-ratification work for Boiler 1 in MSM Johor to boost utilization rate and volume, more than enough to meet the surging demand onwards, which we think could offset higher input cost and refining costs and consequently profitability.

• Revision. We reduce our FY22F earnings forecast by 64%, after we incorporate various challenges and headwinds as aforementioned.

• Our call. Maintain a BUY call with unchanged TP of RM1.20 pegged at RM2.30 FY23F BV/PS to 3-year average historical P/BV of 0.50x. The valuation is justified given the expected turnaround in 2023 on the back of improving demand and utilization rate in addition to an expected drop in cost.

• Upside risk to our call. (i) stronger-than-expected demand, (ii) successful application in revision in refined sugar ceiling price, (iii) improvement in utilization rate, and (iv) normalization in costs.

Source: BIMB Securities Research - 21 Nov 2022