Weak Start to the Year

MSM recorded a 1Q18 core profit of RM16m (vs a core loss of RM35m a year ago), which came in below our and consensus estimates. The lower-than-expected net profit stemmed from a sharp decline in revenue (-16.3% qoq and -15.4% yoy) due to weaker sales volumes in both the domestic and export markets despite more-favourable raw sugar prices and a stronger RM during the quarter. Nonetheless, we expect some improvements in the subsequent quarters due to lower raw sugar cost. Maintain HOLD, with a revised TP of RM3.76.

1QFY18 Below Expectations, Volume Disappoints

MSM’s 1QFY18 revenue came in lower (-16.3% qoq, -15.4% yoy) mainly due to a 10.5% qoq and 7.1% yoy decline in sales volumes to 222.7k mt. This came from stiffer competition in the domestic market due to additional volume coming from AP imports and the smuggling of sugar into the country. Increased volumes from players such as India and Thailand caused a supply glut worldwide which contributed to the decline in exports in 1QFY18. Net profit came in below expectations, accounting for 12.2% and 11.7% of our and consensus 2018 forecasts respectively.

Margins Relatively Flat Qoq, Buoyed by Lower Raw Sugar Prices

Despite the decline in revenue, net profit was up qoq and yoy mainly due to lower average raw sugar prices during the quarter (USD 14-15 cts/lb in 1QFY18 vs USD21 cts/lb in 1QFY17) and lower tax rates qoq. This was tempered by a rise in finance costs due to drawdowns made for the construction of the Tanjung Langsat refinery in Johor, which is expected to be completed by end of June 2018. On a qoq basis, the EBITDA margin was relatively flat, as the improved gross margin was offset by an increase in administrative costs. (This note marks a transfer of coverage.)

Maintain HOLD With Higher TP of RM3.76

We cut our earnings forecasts for 2018E slightly, to reflect lower volumes faced in the domestic market and unfavourable margins for the export market. Nonetheless, we foresee improvements in the subsequent quarters due to better domestic demand stemming from the upcoming festive seasons and improving consumer sentiment. We maintain our HOLD call on MSM with a higher TP of RM3.76 as we roll forward our TP based on an unchanged 20x PER on 2019E EPS. Upside risks: i) favourable hedged raw sugar prices, ii) sharp increase in sugar ceiling price, and iii) stronger-than-expected sugar demand. Downside risks: i) high start-up losses of Johor refinery and ii) weaker sugar demand.

Source: Affin Hwang Research - 24 May 2018