The Government has proposed to cut its sugar subsidy by RM0.20 per kg to RM0.34 per kg in Budget 2013. This will accordingly raise the retail price of sugar by RM0.20 per kg to RM2.50 per kg.

Promoting a healthier diet among Malaysians. After unexpectedly increasing subsidies by RM0.34 per kg to RM0.54 per kg in Jan 2012 (we had previously expected an increase in the sugar price ceiling, rather than an increase in subsidies), the Government has decided to cut its sugar subsidy as it looks to promote a healthier, lower-sugar diet among its people, as well as rationalize its expenditure on subsidies (please see Figure 1 for historical sugar subsidy hikes and cuts).

A negative move for MSM. The corresponding RM0.20 per kg rise in the retail price of sugar to RM2.50 per kg will put some pressure on domestic consumption. However, the impact of this reduction on MSM's total volumes is unlikely to be substantial for two reasons: (i) only 56% to 60% of MSM's total volume is subsidized, and (ii) sugar demand is fairly inelastic in view of the lack of cheaper sweetening alternatives and the fact that sugar is still considered affordable. A reduction in sugar subsidies is hence better for MSM as the Government is also raising the sugar price ceiling (which will lead to lower selling volume), as opposed to keeping the existing price ceiling (which may not result in any change in sales volume).

Trimming forecasts. For every 1% reduction in domestic volume, we expect MSM's FY13 earnings to contract by 1.1%. With sugar retail prices rising by 8.7%, we are cutting our MSM domestic volume forecast by 2.0% (implying a cut of 2.9% for subsidized domestic volume). With just one quarter of year 2012 remaining, we are trimming our FY12 forecast domestic volumes by 0.5%, which implies a domestic volume growth of 1.4% next year.

Maintain NEUTRAL. We are adjusting downwards our FY12 and FY13 earnings estimates by 0.6% and 2.2% respectively as we lower our domestic selling volume projections. Our FV is hence lowered to RM4.84, based on a 13.0x FY13 PE. The company's FY12 and FY13 dividend yields are estimated at 3.7% and 3.8% respectively.

Source: OSK