MSM reported a poor set of results which fell short of both our and street expectations, with net losses widening substantially in 2Q19. 6M19 revenue dropped 14% due to weaker ASPs and volumes as competition intensified amid an oversupply of sugar in the local market. Also, capitalised costs from the new Johor refinery continued to drag on group earnings while its utilization rate remained low due to subdued export demand. After cutting our earnings estimates, we maintain our SELL call on MSM with a lower TP of RM1.05.

Below Expectations on Lower ASPs and Depressed Margins

6M19’s core net loss of RM70m (vs 6M18’s core net profit of RM33.5m) was attributable to lower ASPs (-9.7% yoy) while refining and raw sugar costs crept up, resulting in gross margins tumbling to 2.8% (6M18: 10.2%). The weaker selling prices were due to the c.80-120k/MT surplus of imported sugar from 4Q18’s temporary approved permits (AP), which continued to flood the domestic market in 6M19 and led to a price war with its key competitor. Volumes also dropped by 3% yoy due to lower sales from the industries and exports front. This was exacerbated by start-up losses arising from MSM’s Johor refinery, as commercialisation only began in 2Q19 with low utilisation rates thus far (20-30%) while export demand continues to remain muted over the sugar surplus in global markets.

Headwinds to Continue to Persist in 2H19

Although we believe that domestic ASPs would gradually pick up from the easing sugar oversupply locally, margins are nevertheless expected to remain pressured by the weakened Ringgit alongside high operating leverage from its new refinery. As MSM has locked-in close to 90% of its full-year raw sugar requirements (at 13.6cts/lb), it will therefore not be able to benefit from the downtrend in raw sugar prices (c.80% of forex exposure locked in at US$/RM4.135). Hence, MSM’s prospects in the interim remain lacklustre, as we do not foresee any near-term catalysts. The very least would be the group’s potential new JVs with strategic partners; however, discussions are still at preliminary stages.

Maintain SELL; Price Target Revised to RM1.05 (from RM1.10)

We cut 2019-21E earnings to incorporate a slower ASP recovery alongside higher-than-expected start-up costs from its new Johor refinery. As a result, we arrive at a lower 2020 TP of RM1.05 based on an unchanged 0.4x forward P/BV target and maintain our SELL call on the stock. Upside risks: i) recovery in ASPs; ii) stronger-than-expected volume sales, and iii) easing competition in the export market.

Source: Affin Hwang Research - 22 Aug 2019