• Subsidy Rationalisation Initiatives (SRI) are in motion upon government's resolute approach to deficit reduction.

• Government's decision to uplift the ceiling for sugar prices is an essential measure in direct response to the formidable cost challenges encountered by sugar players.

• We uphold our BUY recommendation with a target price (TP) of RM1.49, awaiting additional clarity on the implementation of SRI.

Sugar in the spotlight

The implementation of SRI is underway as the government is determined in its deficit-cutting measures and sugar has been a topic of discussion poised for potential impact. We anticipate that this move will have repercussions for MSM particularly, being one of the two largest sugar producers in Malaysia once the ceiling price is revised. Currently, the retail price for wholesale stands at RM2.85/kg and this has not been subsidised since 2013.

Grapples with soaring cost

At present, Malaysia relies on 100% imports for its raw sugar, constituting about 80-90% of the production cost. This has led to financial strains, driven by a steep YoY increase in raw sugar prices (+44.5%), compounded by elevated freight expenses, soaring natural gas costs, and the fluctuating value of the Ringgit Malaysia (RM). However, with expectations of a rebound in the RM next year and the potential realisation of a revised price structure, there could be a positive impact on MSM.

Sensitivity Analysis

According to our sensitivity analysis, a 10% increase in sugar prices could result in an improvement in Loss Before Tax ranging from 4% to 19% for FY23. This analysis assumes that costs and the USD/MYR exchange rate (forecasted at RM4.50) will remain at current levels and that the price adjustment will take effect in November 2023. Note that, MSM has an average YTD FY23 hedging rate of RM4.54.

Contingency Measures

Conversely, if the SRI on sugar is to be put on hold, MSM has outlined initiatives to improve their margin which includes; 1) expansion of Gula Super sales in APAC regions with higher ASP, 2) increase sales of bulk 50kg volumes to a broader export market, and 3) optimizing operational group yield to reach 95% (current 55-63%). To recap, in 1H2023, MSM’s total sales revenue increased by 9% YoY, primarily driven by a rise in the ASP, despite a lower volume YoY (-4%).

Maintain BUY call with TP of RM1.49

We retain our share price and earnings forecast, pending further clarity on the implementation of SRI. Reiterate our BUY call for MSM 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.

Source: BIMB Securities Research - 4 Oct 2023