• MSM turned profitable in 4Q20 for the first time since 3Q18, registering a core net profit of RM46.4m, backed by improved margins from better capacity utilisation and lower financing costs
• Consequently, 2020 core net loss fell to RM8.4m (vs 2019: -RM128m), coming in above our and consensus expectations
• In view of the better-than-expected performance, we now project 2021-22E earnings of RM81m-RM103m, inputting higher sales and better margins. Upgrade to BUY with a higher TP of RM1.27

Strong Rebound in 4Q20

MSM registered a 4Q20 core net profit of RM46.4m, returning to the black for the first time since 3Q18. This comes on the back of stronger revenue at RM630m (+22% yoy) due to an increase in export volume (>100%) and industrial (+11%) though this was slightly offset by wholesale (-10%). The 4Q20 EBITDA margin expanded to 10% attributable to: i) a higher GP margin of 15% (4Q19: 3%) on lower raw sugar and refining cost, ii) better capacity utilisation, and iii) lower financing costs due to lower interest rates, just-in-time processes & improved collection from customers. Consequently, the core net loss fell to RM8.4m (vs 2019: -RM128.8m), coming in above our and consensus expectations. The variance to our forecast was predominantly on lower-than-expected operational expenses.

Better ASP and Volume for Export Sales Could be Sustained

Sequentially, revenue rose by 6% while 4Q20 returned to core profitability from a net loss of RM18.8m in 3Q20. This was similarly aided by a better GP margin which rose 7.6ppt, on the aforementioned factors. Notably, 2020 saw a surge in export volume, which was up 3x yoy to 271k MT (4Q at 88k MT), although the ASP was softer at RM1.72 (-17% yoy). Near term, we foresee the solid demand for export and industrial sales as well as the ASP uptrend being sustained in 2021, more than offseting the wholesale segment, which remains under pressure due to softer local demand and price competition.

Upgrade to BUY

We raise our earnings estimates to RM81m-103m for 2021-22E, accounting for lower opex, interest costs and stronger export sales. Post-revisions, our TP is raised to RM1.27, based on a higher 0.6x 2021E PBV (from 0.25x) – in anticipation of gradually improving local and export demand in tandem with the vaccine rollout as well as a better raw sugar procurement process. We upgrade our rating to BUY, as MSM looks to have turned the corner and is likely to see a rebound to profitability in 2021.

Source: Affin Hwang Research - 26 Feb 2021