• BIMB Securities, in collaboration with Bursa Malaysia, recently held a Bursa Shariah Corporate Day event in the Bursa Malaysia conference room. One of the two speakers invited was Tn Syed Feizal Syed Mohammad, the Group CEO of MSM Malaysia Holdings Berhad (MSM).

• The group embarked on sustainability and shariah initiatives to uphold its long-term commitment, aligning with the 17 aspects of the United Nation’s Sustainable Development Goals (SDGs).

• MSM has allocated a budget of RM28.5mn for ESG initiatives in 2023 and spent about RM1.98mn on the purchase of new reconditioned trucks to improve fuel efficiency. We expect these numbers to rise for the next couple of years as the group continues to commit to and implements various ESG initiatives in the future.

• We have assigned MSM an overall ESG rating of 3.9 out of 5, placing it in the “Good” rating band.

• Maintain our BUY call on MSM with unchanged TP of RM1.49, based on 0.65x PER, pegged to FY23F EPS.

Summary

As a sugar refining industry, MSM aligns its decision-making with Shariah and ESG initiatives, in accordance with the 17 UN SDGs. The strategy includes reshaping their business model and leveraging opportunities within the global food value chain. An improved ESG rating on FTSE4GOOD Bursa Malaysia Index, from 1 star to 2.4 stars, further demonstrates their commitment to enhancing sustainable and responsible business practices.

The Path of Islam and ESG

Among the 1,200 S&P companies, over 700 meet the ESG criteria, while only 400 satisfy the Shariah criteria when both are considered. MSM believes that the intersection between the 17 SDGs and the principles of Maqasid Shariah is evident in various domains, including Ethical Investing, Social Responsibility, Environmental Stewardship, Corporate Governance, and Sustainable Investments. The company is of the opinion that incorporating both objectives and principles can lead to enhanced cost efficiency. This alignment was exemplified by the reduction in MSM's waste management expenses, which decreased from RM10-12mn annually to just RM2-3mn per year, mainly due to the elimination of expensive landfill transportation. In addition to these efforts, some of the initiatives in 2Q23 include donating sugar to Pertubuhan Rumah Amal Cahaya Tengku Ampuan Rahimah (RACTAR) and conducted Environmental Safety Week 2022. These initiatives align with the goals of improving living standards while fostering national economic and developmental progress.

MSM’s Commitment to a Greener Future

MSM has allocated a budget of RM28.5mn (exclude the actual spending for Fleet Management) for ESG initiatives in 2023 (refer table 2). Some of the ESG initiatives undertaken by the company include a collaboration between MSM Johor and R&D for wasteto-by-product solutions along with a small-scale animal feed trial. They outsourced scheduled waste to authorized suppliers, resulting in a 33.8% decrease in hazardous waste in 2022. In FY22, MSM’s water usage increased to 2,272,817m3, highlighting their commitment to water conservation. MSM Johor (MSMJ) is the only refinery using Granulated Activated Carbon (GAC), to provide lowest possible fine liquor color for sugar boiling. According to management, in May 2023, MSMJ enhanced the GAC with a budget of RM1.4mn for water recycling and waste reduction to the Integrated Effluent Treatment Plant (IETP). The group is also improving wastewater treatment plant (WWTP) with a RM25mn allocation for WWTP upgrades, set to be installed at the Prai operations by 2024. This upgrade focus on efficient effluent treatment before discharge.

In the refining process, natural gas was primarily used to heat boilers, essential for producing steam to refine raw sugar. Recognizing the need for greener solutions to reduce natural gas consumption and improve efficiency, MSM is actively working to complete Boiler 3 by 3Q24 to ensure a reliable steam supply. Additionally, they have plan to introduce a Biomass Boiler by 2025 or 2026, which could reduce natural gas consumption by up to 50% and lower the cost of raw sugar melting by 15-20%.

Additionally, we note that, MSM’s energy efficiency initiatives have also involved a budget of RM1.60mn, which includes the installation of zero-cost solar panels through a 20-years electricity procurement contract. This is in-line with the nation’s Net-Zero Emission by 2025, and we anticipate the installation of solar photovoltaic (PV) systems at Sungai Buloh Warehouse (SBW) will take place by end of 2023, providing an estimated minimum capacity of 0.547 MWp.

We also note that, in addition to MSM Logistics, MSM has allocated RM1.98mn for the acquisition of refurbished trucks to enhance fuel efficiency. They have extended their ESG

initiatives in the logistics sector by investing RM220,000 in EV vans. Furthermore, MSM's active involvement in The Program Perintis MSM - Kadet Usahawan Logistik, a collaborative project with Felda, highlights their commitment to advancing sustainable practices and fostering entrepreneurial growth within the logistics industry.

Cultivating a Diverse and Inclusive Workforce

MSM prioritizes employee engagement, supportive work for career development and organizational efficiency. The group maintain ISO 45001:2018 certification and achieved a substantial reduction in the Lost-Time Incident Rate (LTIR) to 1.98 YTD in 2023 from 1.55 in 2022. MSM also support employees’ rights to form independent associations and has established collective agreements with unions. Despite a predominantly male workforce, MSM is committed to enhancing gender diversity with a target of 1:5. women-to-men ratio among employees and increasing the number of women in top and senior management roles to 9 by 2023. MSM’s effort in promoting diversity, safety, employee growth, and equity throughout the supply chain are expected to positively impact the company’s position and ranking.

Upholding Integrity and Governance Excellence

The group’s decision-making complies with regulatory requirements and good governance principles to uphold integrity and ethical business conduct. This commitment to ethical conduct is reinforced by comprehensive policies, including a Whistleblowing Policy, Code of Business Conduct and Ethics, a Conflict-of-Interest Policy, an Anti-Bribery Policy Statement, and a Sponsorship and Donations Policy. The group’s governance framework is strengthened by robust policies, including the Credit Control and Sales Payment Terms Policy as well as the Group Inventory Reporting Policy. These policies are subject to diligent oversight by the Corporate Governance and Risk Management (CGRM) division.

Conclusion. Overall, MSM has established a robust ESG strategy that is integrated with Islamic principles (Maqasid Shariah) to effectively addresses its primary business concerns, aligning strongly with the UN SDGs. As a sugar refiner operating in an industry with significant environmental challenges, MSM takes a proactive approach to enhance its efforts. According to management, MSM has allocated a budget of around RM28.5mn for ESG initiatives in 2023 in collaboration with the ESG committee. As a result, we have confidence in MSM’s initiatives and expect the group to remain steadfast in its sustainability efforts, ultimately delivering enhanced value to its shareholders.

BIMB’s ESG Score for MSM

We have assessed MSM ESG’s initiatives based on our framework which evaluate its overall ESG risk. Our final ESG rating score summarizes how well a company’s ESG risks are being managed. We have assigned MSM an overall ESG rating of 3.9 out of 5 which falls in the rating band of “Good”.

Our view: Navigating Challenges and Expanding Horizons

MSM heavily relies on 100% imported raw sugar, which constitutes approximately 80-90% of its production costs. This situation has posed financial challenges, exacerbated by a significant YoY increase in raw sugar prices (44.5%), elevated freight expenses, escalating natural gas costs, and the fluctuating value of the Ringgit Malaysia (RM). However, MSM has taken costsaving measures (C2R Program) by optimising the capital structure and diversifying its product offerings. This is evident by MSM’s aspiration on expanding its market share in the Asia-Pacific (APAC) region by over 10% (4.0mn MT) through MSMJ. Simultaneously, the company aims to boost exports of value-added products (Liquid Sugar and Premix) to China, the Philippines, and Indonesia. These efforts are expected to increase MSMJ's Utilization Factor (UF) to 50% in 4Q23. Overall, with expectations of a recovery in the RM (forecast at RM4.40 for FY24) and the potential implementation of a revised price structure, we anticipate a resurgence for MSM with net margins of 1.1% and 2.8% in FY24F and FY25F respectively.

Maintain BUY 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. We like MSM due to; i) concentrated effort in implementing ESG initiatives by aligning the 17 SGD goals and Maqasid Shariah principles ii) its ongoing efforts through improved cost efficiency program to optimize the capital structure and iii) its ISO certified product range which could enhance revenue streams.

Source: BIMB Securities Research - 6 Nov 2023