Following the 24% run-up in the share price in the month to date, we believe the stock is now hovering at a more justifiable valuation. For 2020, we are still projecting a core loss of RM95.2m as we foresee an overall softer demand for refined sugar against the backdrop of the Covid-19 disruptions. In view of the limited upside, we downgrade MSM to a HOLD rating at an unchanged TP of RM0.44.

Lower Raw Sugar Production Expected for 2020

Global sugar production for 2019/20 is estimated to decline by c.6m MT to 174m MT. This is primarily due to an anticipated 5m MT production decline in India due to a smaller harvesting area and a decline in average sugar yields. Meanwhile, major producers such as Brazil and Thailand are also expected to see lower production figures with more sugarcane being directed towards ethanol production (Brazil) and lower sugarcane yields (Thailand).

Softer Demand May Pressure ASP in the Near Term

While lower production is a boon to sugar prices, overall weaker demand amidst Covid-19 may well tilt an anticipated deficit year to one of surplus in 2020. Raw sugar prices, which had rallied towards end-2019, have reversed over the past month, likely owing to softer sugar demand. In tandem, ASPs for the industrial & export segment may see renewed pressure as they closely track international sugar price movement.

Export Initiatives for Downstream Products Remain Intact

We are positive on the group’s expansion into value added downstream products. As part of MSM’s 3-year strategic plan, the group aims to diversify its product offerings to boost volume and uplift the utilisation of the Johor refinery (currently at c.20%). We understand that more enquiries are coming in for liquid sugar and premix, although larger volumes have yet to be secured. Further diversification into products such as cordial, condensed milk and chocolate are also on the cards for 2020-21.

Downgrade to HOLD

Following the 24% run-up in the share price in the month to date, we believe the stock is now hovering at a more justifiable valuation. We maintain our 12-month TP of RM0.44, pegged at 0.2x CY20E BVPS. Given the limited upside, we downgrade MSM to a HOLD from Buy. We expect MSM to remain loss-making in 2020 as we foresee overall softer demand for refined sugar amidst the Covid-19 disruptions.

Source: Affin Hwang Research - 9 Apr 2020