Following our recent meeting with management, we continue to foresee depressed ASPs and the weaker Ringgit to drag on MSM’s profitability in 2019. To lift the group out of the gloom, management intends to diversify its portfolio with value-added products and secure strategic partners to further its expansion goals. Nonetheless, prospects for the group remain bleak over the near term mainly due to domestic headwinds. After adjusting our earnings forecasts, we derive an unchanged TP of RM1.10. Reiterate SELL.

Domestic Market Woes Still Persist

Although management has observed a sequential pick-up in domestic volumes, we gather that average selling prices (ASP) have yet to recover, hampered by the protracted glut of sugar supply as a result of temporary approved permits (AP) issued in 4Q18 (expired in April 2019), which brought in ~100k MT locally, as well as smuggled sugar. 2H19 could be further weighed on by the local sugar tax imposition, in addition to issuance of APs granted to F&B manufacturers in East Malaysia.

Improved Outlook on Global Sugar Supply Could Bolster Exports

On the flipside, revised forecasts by the USDA imply a 3m MT deficit in sugar stocks in 2019/20, which could bode well for export prospects and lift MSM’s Johor refinery utilisation rate, which currently stands at 20-30%. In the meantime, the global premium for refined sugar is still low, which compels the group to stay selective on its exports destinations.

Pivoting Towards Downstream Amid Potential Industry Shakeup

In view of the stiff challenges posed by the potential liberalisation of the local sugar industry, domestic supply surplus as well as health-conscious campaigns against sugar consumption, management’s three-year strategy over 2019-21 includes the development of new value-added products such as sugar pre-mixes and liquid sugar serving the Asian markets. At the same time, they are exploring potential collaborations with international strategic partners to support both upstream and downstream aspirations.

Maintain SELL

While credit is due for management’s forward-looking initiatives to address the company’s current plight, it is early days yet to ascertain any positive outcomes arising from these manoeuvres. Post-meeting, we adjust our EPS by 1-5% for 2020-21E although our TP of RM1.10 remains unchanged based on 0.4x 2020E P/BV. Hence, we maintain our SELL recommendation. Upside risks include: i) sharp ASP recovery; (ii) pullback in domestic sugar supply glut; and iii) rally in export demand.

Source: Affin Hwang Research - 4 Jul 2019