9M17 net loss stood at RM45.7m, narrowing from the loss of RM56m in 1H17, as the gap between raw sugar price and selling price of sugar improved in 3Q17. The result came in slightly above our forecast but below consensus. While MSM has turned profitable in 3Q17 after 2 consecutive quarters of losses, the 3Q17 net profit was lower by 55% yoy due to the high raw sugar forward price and RM weakness. We maintain a SELL rating with an unchanged TP of RM3.20 as the higher inventory cost remains a drag and valuation is not attractive.

Profitable Quarter After 2 Quarters of Net Loss

MSM recorded a 3Q17 net profit of RM10.4m, turning profitable after 2 quarters of net loss in 1H17. 3Q17 revenue increased by 5.6% yoy to RM669m due to better ASPs, as the sales volume declined by 2k mt to 253k mt. Sales in the domestic market declined by 6% yoy to 118k mt (47% of sales in 3Q17), but was partially offset by increased volumes to the industries and export markets. Nevertheless, the 9M17 net loss of RM45.7m came in slightly ahead of our previous 2017 expectation of a RM56m net loss but significantly below consensus’ expectation of a RM146m net profit.

Profitability Hit by Higher Raw Sugar Prices and RM Weakness

3Q17 net profit declined by 55% yoy to RM10m due to higher raw sugar costs (+11% yoy) and a weak RM. The 9M17 average sugar cost stood at 18cts/lb while MSM has fully locked in a 4Q17 price at 14-16cts/lb. As the global raw sugar price is likely to drop further due to a greater surplus and with MSM still holding on to unsold higher-cost inventory, we believe that 4Q17 is likely to be challenging as well. Also, the interest expense in 3Q17 has increased to RM10.4m (vs. RM3.2m in 3Q16). This could due to the higher borrowing cost to fund the capex for the Johor refinery, at which construction is expected to be completed by 1Q18 and production should commence in June 2018. MSM expects a 30-40% utilisation rate in 2018 and 70% for 2019. The breakeven utilisation is guided to be around 40%.

Maintain SELL With TP of RM3.20

We forecacst a lower net loss of RM16.2m from RM55.7m previously, to factor in the better-than-expected 3Q17 results. We maintain a SELL rating with an unchanged 12-month TP of RM3.20, based on a 16x FY18E PE (3- year mean PE). As the stock is currently trading at 20x FY18E PE with an estimated dividend yield of 3.3%, we do not think the valuation is attractive.

Source: Affin Hwang Research - 23 Nov 2017