MSM’s 1Q17 net loss of RM34.6m came in below our and consensus forecasts. While there was revenue growth of 17.3% yoy, the 1Q17 EBIT loss was RM38.1m, largely due to a rise in cost of sales because of ringgit weakness and a high raw sugar forward price that MSM had locked in. We believe this will continue to affect MSM, and domestic sugar ceiling prices are unlikely to be increased while industrial and export sugar fluctuate according to the world raw sugar price. Downgrade to SELL with TP of RM3.63 (previously RM4.26).

1Q17 Net Loss of RM34.6m

In 1Q17, revenue increased by 17.3% yoy to RM649m due to better ASPs, while sales volume only improved slightly by 1.6k mt to 238.6k mt. Sales in the domestic market increased by 19% yoy to 115k mt (48% of total sales vs 41% in 1Q16), whereas sales in both the industries and export segments decreased by 5% yoy and 26% yoy to 92k mt and 32k mt, respectively, accounting for 39% and 13% of total sales. Nonetheless, MSM recorded a net loss of RM34.6m, coming in below our and consensus expectations.

1Q17 GP Margin Hit by Increase in Raw Sugar Prices, RM Weakness

The revenue increase could not offset the rise in the cost of sales, mainly due to a higher contracted raw sugar price and RM weakness, causing the 1Q17 GP margin to drop by 18.2ppts to 0.5%. The average 1Q17 raw sugar cost was hedged at USD 21.0 cts/lb (which was a 40% increase yoy) whereas the average 1Q17 RM/USD rate was RM4.45 vs. RM4.19 in 1Q16. Management has guided that raw sugar prices have been mainly covered until 2Q17 at about USD20.0 cts/lb but note that the raw sugar price has come down to levels of USD15 cts/lb ytd. Recall that MSM was previously able to pass on raw sugar costs to the industrial segment; however, these ASPs fluctuate according to raw sugar price and since it has come down, industrial prices would have also decreased accordingly.

Downgrade to SELL With TP of RM3.63

We cut our earnings by 38-44% for FY17-19E, mainly by assuming blended industrial prices to be lower as the raw sugar price has fallen and the forex to be at RM4.20/USD$. We also believe ceiling prices for domestic sugar are unlikely to rise after the increase in March 2017 and raw sugar price is trending downwards. After rolling forward to FY18, we downgrade MSM to SELL with a 12-month TP of RM3.63 from RM4.26, based on our updated PE of 16x which is equivalent to its 3-year mean PE (previously 12.5x). Risks: i) favourable hedged raw sugar prices, ii) sharp increase in sugar ceiling price, iii) stronger-than-expected sugar demand.

Source: Affin Hwang Research - 1 Jun 2017