Less sugary 9M16 results

MSM’s 9M16 net profit of RM106.3m (-50.3% yoy) came in below our and consensus forecasts at 61% and 50%, respectively. While there was revenue growth of 10.8% due to volume growth from the domestic and export segment, the 9M16 EBIT margin declined by 9.9ppts to 7.2% due to a spike in raw sugar prices and ringgit weakness. Downgrade to SELL from HOLD with a lower TP of RM4.26.

9M16 net profit of RM 106m below expectations

While MSM recorded an increase in 9M16 revenue by 10.8% yoy to RM1820.1m, net profit decreased by 50.3% yoy to RM 106.3m. This came in below our and market expectations, accounting for 61% and 50% of estimates. Revenue increased as sales volume went up by 3.5% yoy to 758.6k mt, driven by growth from the domestic segment (+23.3% yoy) and exports (+6.7%yoy), which mitigated the decline of 13.3% yoy in the industries segment, but this is partly due to reclassification and price adjustment. Sales in the domestic market accounts for 53% of revenue (9M15:44%), followed by the industries segment at 36% of revenue (9M15:45%) and the exports at 11% of revenue (9M15:11%). MSM declared a 1st interim dividend of 10sen (vs 9M15 DPS of 12sen).

9M16 GP margin hit by increase in raw sugar prices, RM weakness

The revenue increase could not offset the rise in costs mainly due to higher raw sugar prices and the RM weakness. Note that the 9M16 GP margin has dropped by 7.9ppts to 15%. 9M16 raw sugar cost is at 18.0 cts/lb vs. 9M15 at 15.3 cts/lb. As such, 9M16 EBIT margin saw a contraction of 9.9ppts to 7.2%, also attributed to an increase in selling and distribution costs. Management has guided that raw sugar prices have been mainly covered until 1Q17 but expect raw sugar prices to increase moving forward. While MSM is able to pass on some costs to the industrial segment (approved permit (AP) was repriced again effective 1st November to RM2,780/tonne from RM2,400-2,500/tonne and may be further repriced in January 2017), they are still unable to pass it through the domestic segment where the ceiling price still remains at RM 2.84/kg.

Downgrade to SELL (from Hold) with TP of RM4.26

We cut our 2016-18E earnings by 10-20% mainly due to higher raw sugar price assumption at 18.5/20/20 cts/pound (from 17.5/16.5/16 cts/pound) for FY16E/17E/18E. We downgrade to SELL with a lower 12-month TP of RM4.26 from RM4.72 based on an unchanged PE of 12.5x (3-year mean PE) as we see limited catalysts moving forward while raw sugar is expected to rise. Upside risks: i) favorable raw sugar prices, ii) sharp increase in sugar ceiling price iii) stronger-than-expected sugar demand.

Source: Affin Hwang Research - 22 Nov 2016