MSM reported a net loss in 1Q19, falling short of our and the street’s expectations. Sales declined 12% yoy on the back of lower average selling prices (ASPs), as the supply glut of sugar remains unabated. Earnings were further dragged down by losses arising from the group’s newly set-up Johor plant. Intensified competition on both the local and export fronts continues to weigh on MSM’s prospects, while the local sugar tax imposition poses an additional downside risk. After slashing our earnings estimates, we roll forward our valuation base and arrive at a lower revised TP of RM1.10. Maintain SELL.

Below Expectations

MSM slipped into the red in 1Q19, reporting a net loss of RM7.1m (vs net profit of RM15.8m in 1Q18), which was below our and consensus estimates. While volume growth was flattish (+0.9% yoy), we understand that competitive pressures drove ASPs down (-11.8% yoy) amid persistent oversupply in the market, while domestic sales were further plagued by an additional 80-120k/MT of imported sugar from temporary approved permits (AP) issued at end-2018. The LBT of RM19m recorded from its new export-focused Johor refinery – which only went into commercial production in 2Q19 – further weighed upon the group’s profitability.

Subsequent Quarters Remain Challenging

We expect margins to remain under pressure in the coming quarters, hampered by intensified competition in both local and foreign markets, alongside the weakening Ringgit. For 2019, management has guided that c.84% of raw sugar requirements have been locked in at 13cts/lb, while only half of forex exposure was covered (at US$/RM4.12). The local sugar tax imposition in July further poses a risk to domestic industrial volume sales, which fell 7.4% yoy in 1Q19. In our view, MSM’s turnaround prospects hinge upon a recovery in selling prices and exports from a normalisation of the global sugar supply. That being said, earnings visibility appears dim in the near future.

Maintain SELL With Lower TP of RM1.10

After incorporating our assumptions for a slower ASP and volume pick-up, we now foresee 2019E to be a loss-making year for MSM. We roll forward our valuation horizon and therefore arrive at a lower TP of RM1.10 based on a 0.4x forward P/BV (2.5sd below 2-year historical average; from 0.8x and 2.0sd). Consequently, we maintain our SELL recommendation on the stock. Upside risks: i) favourable ASPs, ii) stronger-than-expected sugar demand, and iii) abating competition in the export market.

Source: Affin Hwang Research - 24 May 2019