• Excluding one-off items, 3Q20 losses narrowed to RM8.3m (vs 3Q19 core net loss of RM40.5m) backed by: i) higher sales volume, ii) better raw sugar procurement cost, and iii) improved production cost and yield.
• YTD the group posted a narrower 9M20 core net loss of RM54m (vs 9M19 core net loss of RM97m), though still below our expectations.
• We widen our 2020E core net loss forecast to RM57.9m, taking into account a higher drag from MSM Johor. Maintain HOLD with a lower TP of RM0.56.

9M20: Slightly below expectations

MSM’s 3Q20 core net loss narrowed to RM8.3m (vs 3Q19 core net loss of RM40.5m), on the back of higher export (>100% yoy) and industrial sales (+11% yoy), but these were partly offset by the wholesale segment (-36% yoy). The EBITDA margin expanded by 12.7ppt to 6.6% tracking a higher gross profit margin of 7% (on a better raw sugar procurement cost vs GP margin of -6% in 3Q19) as well as improved production cost on better efficiencies achieved. Consequently, the YTD core net loss narrowed to RM53.7m (9M19: -RM96.5m) after adjusting for one-off items comprising of write-offs and impairments in relation to MSM Perlis which had ceased operations in June 2020. The results are below our full-year expectations (but within street’s), with the variance on higher-than-expected costs given the under-utilisation of the Johor refinery plant.

Challenges remain going forward

Revenue rose by 33% qoq riding on improvement seen across all segments while the core net loss further narrowed, aided by slightly better production efficiencies. That said, we note that the Johor refinery plant is currently at a 26% utilisation rate and remains a drag in the near term, being well below the breakeven point of 48%. Elsewhere, despite higher ASPs (up 4-9% yoy) seen across all segments, blended ASP for 9M20 is relatively flat at RM2.11/kg given the higher mix of export and industry segments that fetch lower ASPs. We expect the more profitable wholesale segment to remain under pressure in subsequent quarters, due to more competitive pricing from its nearest competitor.

Maintain HOLD

We widen our 2020E loss forecast to RM57.9m from RM47.3m previously, accounting for a higher operational drag from MSM Johor, and keep the 2021-22E forecasts for now. Post-revisions, our TP is lowered to RM0.56, based on an unchanged 0.25x 2021E PBR. Notwithstanding better volumes seen in the export and industrial divisions, the more profitable wholesale segment remains under siege while MSM Johor is still a drag to the group. We maintain our HOLD rating.

Source: Affin Hwang Research - 17 Nov 2020