MSM’s 1Q20 core net loss of RM27.1m (vs. RM4.8m in 1Q19) was broadly within our expectations but below consensus. Higher sales from the industry and export segments were negated by lower wholesale segment volume coupled with losses from MSM Johor due to its low plant utilization rate. We make no change to our earnings forecasts. After rolling over our valuation basis, we derive a higher TP of RM0.67, using a higher target PBR of 0.3x 2021E – given the earlier-than-expected reopening of most HORECA and other dine-in channels, which should gradually improve end-consumption of sugar products. However, in view of limited upside at current levels, we maintain our HOLD rating on MSM.

Broadly Within Expectations

MSM posted another loss-making quarter, with a core net loss of RM27.1m (vs. 1Q19 net loss of RM4.8m). This was largely attributable to the drag from its Johor refinery plant due to higher depreciation and finance cost on top of higher overall expenses from a low plant utilisation rate of c.34%. Revenue rose 5.2% yoy to RM510.8m on the back of a higher contribution from industry and export segments, but partially offset by lower wholesale volume (Fig 4). In particular, higher industry segment volume was achieved due to better pricing & perceived quality of MSM sugar from industry clients whereas export volume was higher on contribution from its new value-added products such as premix, liquid sugar and fine syrup.

Focus on Improving MSM Johor’s Utilisation Rate

All in, we deem the result to be broadly within our full-year core net loss expectation of RM95.2m but below consensus’ loss of RM54m. Going forward, we note that the group intends to raise production in MSM Johor towards a breakeven utilisation rate of 48%, in part through the launch of healthy sugar variants in June 2020 and penetration of new export markets (aside from existing Chinese clients) for its liquid and premix sugar.

Maintain HOLD Rating

We make no major changes to our earnings forecasts. After rolling forward our valuation horizon to 2021E (from 2020E), we derive a higher 12-month TP of RM0.67, but based on a higher target PBR of 0.3x (from 0.2x previously) considering the slightly earlier-than-expected reopening of most Hotel, Restaurant, Café (HORECA) and other dine-in channels, which should gradually improve end-consumption of sugar products. Given the limited upside at current levels, we maintain our HOLD rating on MSM.

Source: Affin Hwang Research - 28 May 2020