MSM’s 1H17 net loss of RM56m came in below our and consensus forecasts. Revenue grew by 13% yoy, but 1H17 EBIT loss was RM64.5m compared to a positive EBIT of RM97m in 1H16. Similar to 1Q17, losses in 2Q17 was caused by Ringgit weakness and high raw sugar forward price that MSM had locked in. 3Q17’s outlook will remain challenging as MSM’s sugar inventory cost is still high. Maintain SELL with a lower TP of RM 3.20 (previously RM 3.63).

Second Consecutive Quarter of Net Loss

MSM recorded a 2Q17 net loss of RM21.5m, extending the RM34.6m net loss in 1Q17. In 2Q17, revenue increased by 9.2% yoy to RM692.5m due to better ASPs, as sales volume declined by 13k mt to 257k mt. While domestic sales increased marginally by 3% yoy to RM331m, industries sales increased by 28% yoy on the back of improved selling price. Sales volume declined across all segments, with the domestic segment declining by 5% yoy to 119k mt. industries segment decreasing 4% yoy to 103k mt, and export segment falling 8% yoy to 35k mt. In short, 1H17 net loss of RM56m, came in significantly below our and consensus 2017E expectations of RM120m-RM135m net profit.

Dragged Down by Increase in Raw Sugar Prices and RM Weakness

Cost of sales increased by 23% yoy mainly due to higher contracted raw sugar price and RM weakness, causing the 2Q17 GP margin to drop by 10.7ppts yoy to 2.9%. Management hedged 2Q17 raw sugar cost at around USD20cts/lb but the raw sugar price has come down to USD14cts/lb level ytd. We understand that currently MSM has around 240k MT of refined sugar inventory (equivalent to 3 months’ sales) priced at around USD 20cts/lb. Although domestic sugar’s ASP has a ceiling cap, industries segment’s ASP moves in tandem with raw sugar price that has come down. Therefore, 3Q17 will likely be another challenging quarter.

Maintain SELL With TP of RM3.20

We cut our earnings by 12% for FY18-19E, while projecting a RM55.7m net loss for FY17 (from previous RM135m net profit). We assume higher COGS as MSM has hedged raw sugar price fully for 3Q17 and partially at 4Q17 at a higher rate than current international raw sugar price. We think raw sugar price is unlikely to trend up due to the forecasted global surplus of around 4.5m MT for 2017/18. We maintain a SELL rating with a 12- month TP of RM3.20 from RM3.63, based on unchanged PE of 16x which is equivalent to its 3-year mean PE.

Upside risks: i) favourable hedged raw sugar prices, ii) sharp increase in sugar ceiling price, iii) stronger-than-expected sugar demand.

Source: Affin Hwang Research - 30 Aug 2017