• The government yesterday gave its nod that allows MSM Malaysia Holdings Berhad (MSM) to sell premium grain sugar at a floating price starting from May 25th, 2023. Note that the product offers improved clarity and fewer impurities, with an expected selling price of RM4.20/kg. This should appeal to large industrial customers, to say the least, given the prospects of cost savings for them.

• The completion of rectification works for Boiler 1 in MSM Johor is expected to lead to an increase in production capacity. The average utilization factor (UF) for both MSM Prai and Johor is expected to reach 65% in FY23, enhancing production and sales volume.

• Preliminary assumption on earnings for FY23/FY24/FY25 has been revised based on better UF for both refineries and the assumption of 100k production annually for their latest products. Other drivers include normalization in input costs and favourable currency movement. The government rapid subsidy rationalization drive will also bode well for the company given the expected refloating of sugar prices though this remains a conjecture for now.

• Reiterate our BUY call on MSM with a new TP of RM1.49 (previously RM0.95) based on FY23F BV/PS of RM2.29 that is pegged at 1-SD above mean P/BV of 0.65x.

Approved floating price for fine white sugar

The Domestic Trade and Cost of Living Minister announced that the government has given their nod to allow sugar provider MSM to sell a new variety of sugar, known as premium grain sugar (figure 1), at a floating price starting from May 25th, 2023. The management stated that this premium product, which will soon be available in the market, offers improved clarity and contains fewer impurities with an expected selling price of RM4.20/kg. We are cautiously optimistic on the new product though we expect demand to gain traction particularly next year given larger acceptance and understanding of its benefits. We also acknowledge that demand for the product could potentially demonstrate resilience among the targeted market and customers particularly the industrial users. Note that the announcement regarding the floating price does not pertain to coarse and refined white sugar, which remain capped at a ceiling price of RM2.85/kg and RM2.95/kg.

Utilisation rate to improve as MSM Johor makes a comeback

The management also stated the completion of rectification works for Boiler 1 in MSM Johor which has been a drag to output previously. As a result, the refiner now has two boilers to generate steam for processing and electricity production, paving production capacity to reach its potential (note: up to 1 mn MT/yr). We expect average UF for both MSM Prai and Johor to reach at 65% in FY23F, enhancing production and sales volume. Specifically, the anticipated UF for MSM Prai is 79%, while for MSM Johor, it is 50%.

Our Assumption

We produce new top and bottom line projection after factoring in i) better UF for both refinery on average (FY23: 65%, FY24: 67%, FY25: 73%), ii) preliminary assumption of 100k production output annually combining both refineries to produce the fine white sugar (FY23: 70k MT/yr, FY24: 100k MT/yr, FY25: 100k MT/yr). Others include normalization in input cost, particularly i) raw sugar, ii) natural gas, iii) shipping rates, iv) expected rebound in Ringgit. Note that these assumptions are still subject to changes pending analyst briefing this Monday.

Reiterate BUY with a higher TP of RM1.49

We reiterate our BUY call on MSM with a new TP of RM1.49 (previously RM0.95) based on FY23F BV/PS of RM2.29 that is pegged at 1-SD above mean P/BV of 0.65x. The TP is supported by its bright prospects including an expected improvement in UF, new premium product, normalization in cost, hence a boost to bottom line.

Source: BIMB Securities Research - 26 May 2023