• We attended the MSM Analyst Briefing post 4QFY23 results and were reassured on several matters regarding MSM’s prospects.

• MSM ensured that the company has received a black-and-white agreement with the government, stating that the government incentive will continue until the price increase mechanism is revised in 1HFY24.

• The company anticipates both high export demand and low sugar supply due to extreme weather affecting raw sugar production areas. Nevertheless, MSM has hedged 92% of its wholesale raw sugar for FY24, and the company expects to increase export volume to 25 countries due to the global sugar deficit.

• We revise our earnings forecast higher by 16%/27%/39% for FY24/FY25/FY26 after factoring in higher revenue, cost assumptions, and a lower effective tax rate.

• We uphold our BUY recommendation with a higher TP of RM3.18 (from RM3.04). Our TP is based on FY24F EPS of 30sen, pegged at the global average PER of 10.6x

Assurance in Government Incentive and Price Increase Mechanism

We continue our positive outlook as MSM reassured that they have a blackand-white agreement with the government, ensuring that the incentive of RM1,000/MT for 24,000MT/month for Coarse Grain Sugar (CGS) of 1kg/2kg and Fine Grain Sugar (FGS) of 1kg will continue until the government revises the price increase mechanism, which is anticipated to occur in 1HFY24. MSM returned to profitability after 8 consecutive quarters of suffering losses, thanks to the government incentive aimed at correcting the economic anomaly of sugar pricing.

Low Supply due to Extreme Weather

MSM anticipates raw sugar prices to increase attributed by drier-than-usual weather in Central-South Brazil. Compounding the situation is the elevated probability of an emerging La Niña from mid-year onwards, posing the potential for extended dry spells. Furthermore, the dry weather will also affect India, alongside the anticipation that the ban on sugar exports will continue as India announced a 50% export tax on molasses from sugar refining. Nevertheless, MSM has hedged 92% of its raw sugar for FY24 at USD19-20c/lbs and 24% for FY25 at USD20-21c/lbs.

High Demand due to Global Sugar Deficit

MSM anticipates high demand to come from near region such as Indonesia and Singapore, APAC countries, and Africa. In the nearby region, MSM is currently selling to PT Mayora (200k tonnes/year), one of the largest confectionery makers there. MSM plans to penetrate its neighbour country Singapore by targeting to tap into 1,000 stores with ASP of RM7.50/kg apart from being selected by Giant Singapore to pack under its brand. MSM is targeting to export to 25 countries (FY23: 13) with sales volume target of 300k tonnes for FY24. Note that, their export sales volume counts for 20-25% of overall production.

Earnings Revision

We have adjusted our revenue assumptions upwards for FY24/FY25/FY26 by 8%/8%/14%, respectively, in view of: i) continuous government incentives and sugar price adjustments in 1H2024, ii) improved performance in the export market, and iii) higher expectations for Gula Super production. On the cost front, we have also increased our cost assumptions, anticipating higher production costs due to a +27% increase in raw sugar prices and a +1% rise in the USD/MYR rate, aligning with downside risks in MYR. Nevertheless, despite these cost increases, our PATAMI forecast sees an increase of 16%/27%/39% for FY24/FY25/FY26, respectively. This is because we lowered the effective tax rate, assuming that the tax rate will normalise to 24% going forward in the absence of deferred tax assets, which are no longer recognised as subsidiary.

Maintain BUY call with TP of RM3.18

In tandem with our revised earnings, we have raised our TP to RM3.18 (from RM3.04) and maintain BUY call recommendation. Our valuation is based on the FY24F EPS of 30sen that is pegged at global peers average PER of 10.6x. We like MSM due to its i) effort to boost utilisation factor by building a 3rd boiler in MSM Johor, ii) increasing export sales volume by leveraging on low sugar supply and focusing on near regions, and iii) product variety such as the premium sugar, Gula Super.

Source: BIMB Securities Research - 5 Mar 2024