MSM recorded a 1H18 core profit of RM30.1m (vs a core loss of RM56m a year ago), which is tracking behind estimates. Topline continued to be pressured by AP importers and sugar smugglers which took advantage of the glut in global refined sugar. Moving forward, MSM could also face headwinds from potential changes in domestic sugar policies, and also the persistent glut in the global refined sugar market. We cut our forecasts and downgrade MSM to a SELL with a lower TP of RM3.00.

1HFY18 Tracked Behind Estimates

MSM’s 1HFY18 net profit of RM30.1m (vs a net loss of RM56.1m in 1HFY17) tracked behind estimates, accounting for 31% and 34% of our and consensus full-year estimates respectively. Lower overall tonnage of refined sugar sold and lower ASPs continued to affect topline performance, as we estimate that 1HFY18 volumes and ASPs declined by 7% and 9% respectively. As expected, interest expense also increased leading up to the new Tanjung Langsat refinery coming online in 2HFY18. Although we expect some volume to come online in 2H18 from the new refinery, we are not too optimistic on the export market, which remains intensely competitive.

Volume Improved Qoq, But Margins Shrank

2QFY18 revenue improved on a qoq basis, as the overall ASP decline was more than made up by a recovery in volumes, particularly the export segment which showed a 55% volume increase. However an increase in operating expenses impacted margins and caused PBT to be weaker qoq.

Potential Changes in Domestic Sugar Policies?

Recent media reports indicate that the government might look to reduce the ceiling price of refined sugar from the existing RM2.95/kg level. However we understand that discussions have been ongoing between the industry players and the government with no details of a change just yet. Notwithstanding the decrease in the ceiling price, we believe pressure exerted by the AP imports and smuggled sugar continued to pressure domestic ASPs which hovered around RM2.60/kg in 1HFY18.

Downgrade to SELL With TP of RM3.00

As we turn more cautious from headwinds on both the domestic and export fronts, we reduce our volume and ASP assumptions further and cut our earnings forecasts by 28-6% for 2018-20E. We downgrade MSM to a SELL with a TP of RM3.00 based on an unchanged 20x PER on 2019E EPS. Upside risks: i) favourable hedged raw sugar prices, ii) stronger-thanexpected sugar demand, iii) abating competition in the export market.

Source: Affin Hwang Research - 27 Aug 2018