• MSM hosted a briefing on Monday to address questions on the recently announced 2-month temporary shutdown of its MSM Johor refinery plant for rectification works
• Key takeaways: i) the boiler rectification forms part of a planned improvement process to further increase the efficiency of the refinery, ii) mitigation measures are in place to ensure minimal impact to sales commitments, and iii) full-year sales volume expectation remains intact
• We made no changes to our earnings estimates. At current levels, further upside to our TP looks limited given a 185% run-up in the share price in the past 3 months. Downgrade to HOLD with an unchanged TP of RM1.70

Addressing Concerns Over Temporary Plant Shutdown

MSM explained that rectification works were part of a planned improvement process to enhance efficiency, to better prepare the plant for utilisation of beyond 50% (currently at 27%). The management opted to rectify all boilers in one go instead of a progressive shutdown, saying this will effectively save more time. Note that for its MSM Prai facility, plant maintenance is typically done over a 1-week period, on an annual basis. The rationale on the stark deviation in downtime for MSM Johor (not guided on previously) is unclear, with management generally alluding to it being an improvement process on top of routine preventive maintenance works.

Mitigation Measures to Keep Sales Commitments Intact

The group will utilise its available refined sugar stock (1.5 months) as well as its Prai plant to ensure the continuation of supply to the domestic and export markets. However, in the event of an unexpectedly strong pick-up in demand, priority will be given to the domestic market over export sales. Notwithstanding the latest situation, we expect our 2021 full-year forecast sales tonnage of 1.1m MT (2020: 1.0m MT) to remain largely intact.

TP Unchanged at RM1.70; D/G to HOLD on Share Price Outperformance

The temporary production halt came as a surprise. While there will inevitably be some impact due to MSM Johor’s fixed costs, this may be partially cushioned by the mitigation factors. That said, if the shutdown extends beyond 2 months, we see downside risks to our forecasts. All in all, we make no changes to our earnings estimates in this report, but given the limited upside due to the recent run-up in the share price, we downgrade MSM to HOLD with an unchanged TP of RM1.70, based on a 0.7x 2021E PBR (3-year Mean).

Source: Affin Hwang Research - 15 Apr 2021