• We recently visited MSM Sugar Refinery (Johor) Sdn. Bhd (MSMJ) in Tanjung Langsat and learned that MSM aims to increase its market share in the Asia-Pacific region by more than 10%, with the expanding capacities of MSMJ playing a pivotal role in achieving this goal.
   
• MSM is determined to ramp up MSMJ's Utilization Factors (UF) to 50% by 4Q23, underpinning by seamless operation of both Boiler 1 and 2.

• Maintain a BUY call with a TP of RM1.49 based on FY23F BV/PS of RM2.29 that is pegged at 1-SD above mean P/BV of 0.65x.

The key take-aways from the visit/meeting are highlighted below.

Empowering Markets at Home and Abroad

MSMJ, a subsidiary of MSM Malaysia Holdings Berhad (MSM), operates a cutting-edge sugar refinery in Tanjung Langsat, Johor. The facility spans 50.63 acres with a 50-year lease from Johor Corporation and has been operational since November 2018, boasting an annual melt capacity of 1.0 million MT/year. Looking ahead, MSMJ plans to initiate Phase 2 expansion by 2025, which will enable a combined annual capacity of 2.0 million MT/year. As of 2022, MSM has achieved a total export sales volume of 230,939MT across 17 countries. Notably, Vietnam emerged as the key market, constituting the majority of MSM's exports at 109,00MT in the same year. MSM aspires to enhance its market share in the APAC region by more than 10% (4.0mn MT) through MSMJ itself and concurrently aimsto increase export of value-added products (Liquid Sugar and Premix) to China, Philippines, and Indonesia. MSMJ is the only refinery using Granulated Activated Carbon (GAC), provide lowest possible fine liquor color for sugar boiling.

Amplified Refining Capability

Despite their comparable capacities of 1.0mn MT/year, MSM Prai and MSMJ exhibit varying UF post the completion of boiler rectification efforts. MSMJ's UF currently stands at 30%, contrast to MSM Prai's robust operational UF of 75%. Nevertheless, MSM is determined to raise MSMJ's UF to 50% by 4Q23, a move expected to drive MSMJ towards profitability. The realization of this objective hinges on the successful operation of both Boiler 1 and 2 Throughout the rectification phase, MSM has introduced a comprehensive operational improvement strategy to ensure stable energy operations. A pivotal component of this strategy is the upgrade of the Pressure Reducing Desuperheater System (PRDS), which was previously operating below its capacity at 40 TPH. With the incorporation of an additional 60 TPH, this upgrade enhances the effectiveness of water distribution for steam, a crucial element for optimizing the refining process. Furthermore, MSM is actively working towards the completion of Boiler 3 by the 3Q24. This strategic move aims to establish a consistent and reliable steam supply for uninterrupted operations. In the pipeline, MSM's plan to develop a Biomass Boiler, expected to commence in 2025 or 2026. This initiative has the potential to drastically reduce natural gas consumption by up to 50%, and further reduce the overall cost of raw sugar melting by 15-20%.

Raw Sugar Storage Expansion Amid Refined Warehouse Idle

Presently, MSMJ's raw sugar storage capacity is at 100kMT. However, MSM has indicated that this capacity can be expanded to 300kMT through the implementation of an overhead conveyer and Sugar Dumping Station. Notably, MSM sources 100% of its raw sugar from Brazil (70%), India, Thailand, and South Africa (30%). As of now, MSMJ's existing inventory stands at 72kMT, distributed as follows: 1) ARAMIS from Brazil - 3,774MT, 2) Sania from Thailand- 27,036MT, and 3) MV KBH16 from Thailand - 40,943MT. On average, around 5 raw sugar vessels arrive each year, with an anticipated Brazilian vessel expected to dock in October 2023, carrying a quantity of 44,930MT. However, we note that, the utilization of the current refined sugar warehouses (W1 and W2) has declined following the festive season (Hari Raya), evident in a utilization rate that drop to 12% in week 33 compared to the peak of 100% in week 21. Note that, in 1Q23 MSM’s revenue and LAT declined by 1.3% and 29.6% YoY, respectively, driven by lower sales volume. However, introduction of the new warehouse (W3) is expected to alleviate MSMJ's dependence on external warehouse rentals and provide additional support for plant ramp-up.

Pricing Dilemma

Currently, the production costs stand around 2% higher than the selling price for MSM Prai and 20% for MSMJ, resulting in a negative margin. This is due to prices (RP: RM2.85/kg, Wholesale: RM2.65/kg) remaining stagnant since 2013 despite the continuous rise in input costs. Presently, MSM has commit to monthly minimum domestic production quota of 24,000MT whereas, any surplus demand will be met with Gula Super (premium sugar). In case the pricing is subsidised or fluctuate, it has the potential to contribute a margin of RM0.60-RM1.40 to MSM to balance the equation. Conversely, shall the plan retracted, MSM has outlined strategies to bolster other non-controlled ASP to achieve equilibrium. As at 1Q23, total sales volume is at 90:10 for domestic vs export, which shall include industry, wholesales and SMIs. As for Gula Super, sales have reached 11,000MT since its introduction in May 2023, accounting for approximately 1% of the total sales volume. Gula Super contributes a margin of RM1.00-RM1.20 with a floating price.

Global Sugar Market Shortage Paves Way for Export Expansion

According to the International Sugar Organization (ISO), the global sugar market is anticipated to enter a deficit of approximately -2.12mn MT in 2023/24. We expect that this deficit will open avenues for MSM to expand its exports, consequently leading to a parallel rise in the UF rate of MSMJ. Notably, MSM has been exporting sugar at prices surpassing RM3/kg. Leveraging the higher retail selling prices in the new region market (Sumatra: RM4.20 to RM4.50/kg, Southern Philippines: RM8.50 to RM9.50/kg, Kalimantan: RM4.50/kg, Singapore: RM6.11 to RM6.79/kg), MSM aims for a targeted monthly sales volume of 5,000MT in this segment.

Maintain a BUY call with TP of RM1.49

We have a BUY call on MSM with a TP of RM1.49 based on FY23F’s BV/PS of RM2.29 that is pegged at 1-SD above mean P/BV of 0.65x. As we anticipate the improvement in UF rate and ease in gas cost (1Q23:RM58.04/MMBtu,2Q23: RM48.14/MMBtu), the prospects still to remain bright including i) improvement in UF, ii) new premium products to offer variability and increase ASP, iii) normalization of costs.

Source: BIMB Securities Research - 23 Aug 2023