Despite MSM returning to profitability in 2018 (RM36m vs -RM36m loss in 2017), full-year results stooped below our and consensus expectations, accounting for 60% and 61% of our and street estimates respectively. Higher interest costs, alongside lower ASPs and volume weighed on 4Q18’s performance, resulting in a loss of - RM10.4m. MSM’s outlook continues to look challenging, pressured by a global supply glut, intensified competition and rising raw sugar costs. We maintain our SELL call with a lower TP of RM2.25.

Below Expectations

MSM’s 2018 core earnings of RM35.6m (vs net loss of RM36.3m in 2017) missed expectations as 4Q18 results slipped into the red. Volume sales (-2.5%, FY18: -5.1%) and ASPs (-14.6%, FY18: -12.8%) continued to decline yoy for the quarter, further exacerbated by an ~80-100k MT influx of refined sugar from temporary AP permits issued in Oct18 into the local market. Start-up costs arising from the new Tanjung Langsat refinery had also kicked in during the quarter, despite a delay in operational commencement (until March 2019).

Difficult Year Ahead

Heading into 2019, rising raw sugar prices could more than offset the RM’s strengthening and hence weigh on MSM’s margins, while the group continues to face intense competition on both local and export fronts. The local excise tax levied on beverages with high sugar content beginning in April 2019 poses an additional risk on volume demand. Over the near term, management intends to focus on the domestic and industries markets as supply begins to normalise, while remaining cautious on export sales as market conditions have yet to show signs of improvement. Subsequently, under-utilisation of its new refinery could pose a major earnings risk, as elevated interest alongside depreciation expenses will be recognised post-plant commissioning.

Maintain SELL With Lower TP of RM2.25

We make adjustments to our ASP forecasts and reduce our earnings estimates by -60%/-53% for 2019-20E. We remain wary on MSM’s outlook, with no positives on the horizon yet. Due to the heightened earnings volatility foreseen from its new Johor refinery, we elected to switch our valuation methodology from PER to P/BV. We subsequently maintain our SELL call on MSM with a TP of RM2.25 based on a 0.8x forward P/BV (2sd below 2-year historical average). Upside risks: i) favourable hedged raw sugar prices, ii) stronger-than-expected sugar demand, iii) abating competition in the export market.

Source: Affin Hwang Research - 21 Feb 2019