Although MSM recorded 9M18 earnings of RM46.0m (vs a loss of RM45.7m a year ago), its earnings are tracking behind our and consensus estimates. This was mostly due to weak revenue (-16% yoy for 9M18) due to lower realised ASPs and disappointing sales volumes on a yoy basis. In the near term, we believe the outlook remains challenging for MSM given the demand headwinds domestically and intense competition on the export front. Maintain SELL with a revised TP of RM2.54 based on a lower 19x FY19E PER.

9M18 Tracking Behind Estimates

MSM’s 9M18 net profit of RM46.0m (vs a net loss of RM45.7m in 9M17) is tracking behind estimates, accounting for 66% and 68% of our and consensus full-year estimates respectively. Lower overall tonnage of refined sugar sold and lower ASPs continued to affect top-line performance, as we estimate that 9M18 volumes and blended ASPs declined by 6% and 11% respectively. Export volumes showed the steepest declines for 9M18, as it dropped by 22% yoy due to the glut in refined sugar in the international market.

Volumes Showed Gradual Recovery, But ASPs Continued to Decline

Despite a recovery in volumes on a qoq basis (3Q18: 244m MT vs 2Q18: 239m MT), this was more than offset by a steeper decline in ASPs (we estimate prices to have declined by c.6% qoq), which caused revenue to be lower on a qoq basis. Nonetheless, due to lower interest expenses and a lower effective tax rate, net profit improved by 11% qoq.

Outlook Remains Cloudy on Multiple Fronts

In the near term, we are of the view that it will be challenging for MSM to fill the capacity at its new Tanjung Langsat refinery which commenced operations in September 2018, as the capacity increase comes amidst an oversupply in the domestic market. The export market remains challenging, as seen in the lower volumes (-22% yoy) and steeper ASP declines (-19% yoy) recorded by MSM in 9M18. In addition, cost pressures could arise in 4Q18 due to start-up costs relating to the new refinery.

Maintain SELL With Revised TP of RM2.54

We make adjustments to our ASP forecasts and reduce our earnings estimates by 15-11% for 2018-20E. We also highlight that the proposed ‘sugar tax’ in Budget 2019 could potentially put a dampener on demand for refined sugar, which poses downside risk to MSM’s domestic revenue. We thus maintain our SELL call with a TP of RM2.54 based on a lower 19x 2019E PER (average PER since IPO in 2011; previously RM3.00 on 20x). Upside risks: i) favourable hedged raw-sugar prices, ii) stronger-thanexpected sugar demand, and iii) abating competition in the export market.

Source: Affin Hwang Research - 22 Nov 2018