Bottoming Out

We recently hosted a site visit to MSM’s Johor refinery and obtained an update on its operational outlook. The group has secured a foreign customer for its liquid sugar products, with maiden orders of 10k MT coming in during 4Q19. We believe that the new value-added products including pre-mixes would begin to contribute materially to MSM’s earnings starting in 2020, and partially address the Johor refinery’s low utilisation rate of c.20%. A recovery in sugar prices could also begin to catalyse an earnings recovery next year. We upgrade the stock to a HOLD (from Sell) after the recent share price decline, with an unchanged 12-month TP of RM1.05.

New Refinery Still Running at Low Utilisation…

We gather that the new Johor refinery is running at 18-20% of its 1.25m MT production capacity at present – a dip from 20-30% utilisation rate in 2Q19. This was due to the weakness in raw sugar prices in 9M19, which continued to suppress the global premium for refined sugar and consequently the profitability of export sales.

…but Tide Looks to be Turning in 4Q19

While MSM is likely to post a weak set of results qoq for 3Q19, we foresee losses narrowing progressively from 4Q19 on: (i) an uptick in global sugar prices favouring export sales prospects; (ii) a local ASP revision due to abating price competition; and (iii) maiden volume orders for MSM’s highmargin liquid sugar and sugar premix starting from October 2019.

Downstream foray, partnerships likely to solidify its long-term outlook

Nevertheless, MSM continues to face business uncertainties in its long-term outlook, such as potential liberalisation of the local sugar industry and public campaigns against sugar consumption due to rising obesity rates in Southeast Asia. Given the inherent structural challenges, we regard the pivot towards value-added products as crucial to the group’s evolution. Amid the choppy industry landscape, MSM is still considering various corporate exercise proposals and strategic collaborations.

Upgrade to HOLD

We revise our 2019-21E earnings by -23%/+17%/+50% to incorporate the factors mentioned above as well as cost-cutting measures and likely weakness in the Ringgit, but maintain our TP of RM1.05, based on an unchanged 0.4x 2020E P/BV. Following the recent share price correction, we upgrade the stock to a HOLD (from Sell). Upside/downside risks: i) sharp ASP recovery/fall; (ii) pullback/worsening of domestic sugar supply glut; and iii) rally/deterioration in export demand

Source: Affin Hwang Research - 23 Oct 2019