• 9MFY23 Loss After Tax (LAT) of RM92.8mn exceeded our expectation of RM71.5mn and thus above our estimate.

• Despite challenges in major sugar-producing nations, a global production deficit hints at price support, leading to an elevated NY11 prices.

• MSM has been granted a special ‘incentive’ by the government, a boon to its topline. This is to continue until a final decision is reached on the revised price mechanism, likely next year in 2H24.

• We uphold our BUY recommendation with a higher target price (TP) of RM3.04.

Capacity Optimization and Margin Improvements

MSM’s 9MFY23 LAT of RM92.8mn (31.1% YoY) were above ours and consensus expectations by 129.8% and 411.3% respectively. In 3QFY23, MSM’s revenue surged by +20.7% YoY (RM807mn in 3QFY23 vs RM668mn in 3QFY22), driven by enhancements in both Average Selling Price (ASP) and sales volume. It is worth to note that, Gula Super (sales volume at 10,700MT YTD) contributed about 13% increase in revenue to the Wholesale segment in this quarter. Despite facing higher production costs, the Group managed to reduce overall LAT from RM73mn in 3QFY22 to RM36mn in 3QFY23, underscored by improvement in margins, thanks to enhanced capacity utilization (50% to 55% at the group level).

Global Sweet Spots

Amidst hurdles in key sugar-producing nations including Brazil, India, Thailand, and France that may pose limitations on global supply, the prevailing deficit in global sugar production hints at potential support for prices. Consequently, we anticipate the NY11 price will remain at an elevated level. To meet burgeoning demand, MSM is committed to ramp up UF at MSM Johor which involves boosting the sales of bulk 50kg volume and maximizing export production for countries including China, Indonesia, Singapore, Vietnam, and the Philippines. Currently, MSM exports to 17 countries within the APAC region, with a targeted export volume of 250,000 MT/year. Notably, the first shipment of breakbulk is scheduled for export in the 1QFY24.

Some Sweet Relief

The wholesale segment, constituting 40% of company’s total sales, faces challenges stemming from unchanged ceiling price set by the government over the past decade. MSM has been footing an additional cost of 88sen/kg, given the wholesale price at RM2.69 (retail price at RM2.85). Despite Malaysia's sugar-controlled price being the cheapest in the region and globally, local sugar producers are obligated to meet a minimum monthly

quota of 24,000MT. To address this challenge, MSM has received RM1,000/MT for 24,000MT/month of a special incentive for November and December 2023 for Coarse Grain Sugar (CGS) of 1kg/2kg and Fine Grain Sugar (FGS) of 1kg, translating to an additional of RM24mn revenue for the month or RM48mn for 4QFY23. Note that the incentive will be backdated to 1st November until December at RM1k per metric tonne, equivalent to RM24mn incentive per month based 24k tonne quota (per month). This incentive will be reflected in the company's, topline and expected to remain in effect until the final decision is reached on the revised price mechanism, which we anticipate will be in the 2H2024 (note: incentive or hybrid mechanism). The latter option may potentially temper with demand however due to higher ASP if the government opts for price increase or hybrid. In sum, we prefer incentive option for MSM.

Earnings Revision

In the light of the special incentive and improved margins, we tweaked our FY23 earnings forecast higher to LAT of RM57mn from RM71.5mn and consequently PAT of RM182mn/RM298.4mn for FY24F-25F (Table 2), in view of incentive mechanism for 1H24 and hybrid mechanism for 2H24 onwards.

Maintain BUY call with higher TP of RM3.04 MSM is now valued at TP of RM3.04 based on FY24F EPS of 26sen that is pegged at global average PER of 11.7x. MSM remains a BUY.

Source: BIMB Securities Research - 24 Nov 2023