MSM's 3QFY12 and 9MFY12 earnings of RM48.4m (-2.1%  y-o-y)  and  RM163.6m  (-13.4%  y-o-y)  again  fell  short  of estimates.  The  14.5%  y-o-y  increase  in  effective domestic  selling  prices  targeted  at  compensating  for  the  higher  raw  material costs  was  unable  to  lift  profit  as  softening  domestic  and  export  sales  kept revenue and earnings subdued. We are lowering our FY12 and FY13 forecasts by7.7%  and  7.2%  respectively,  with  a  revised  RM4.50  FV,  based  on  a  13.0x  FY13 PER. The stock's dividend yield is 3.3%-3.4%.

Weaker  than  expected.  MSM's  3QFY12  revenue  and  core  earnings  stood  at RM611.0m  (-2.1%  y-o-y,  +11.9%  q-o-q)  and  RM48.4m  (-2.1%  y-o-y,  -0.4%  q-o-q) respectively.  Revenue  softened  despite  a  14.5%  y-o-y  increase  in  effective  domestic selling  prices  (wholesale  prices  +  subsidy).  While  waning  domestic  and  export  sales were to blame, the 48.6% surge in the cost of raw material sourced from its three-year raw  sugar  supply  contract  (LTC)  further  soured  profits.  The group's 9MFY12  revenue during the nine-month period were the same  as  those  for  3Q,  with  higher  selling  prices  mitigating  the  impact  of  softer  sales volume,  but  higher  input  costs  compressed  earnings.  Consequently,  its  EBIT  margin narrowed by 2.6ppt to 12.8%. MSM's Jan'Sept 2012 net profit accounted for 64.7% and 63.5%  of  our  and  consensus  estimates.  In  comparison,  the  9MFY11  earnings represented 71.4% of MSM's full-year bottomline.

On  the  hunt  for  cheaper  sugar.  Although  sugar  is  a  relatively  affordable  staple, domestic demand for MSM's sugar has been particularly weak this year. While we MSM's better-quality  sugar,  we  think  that  condensed  milk  manufacturers  may  have opted  for  cheaper  sugar.  Sugar,  which  makes  up  a  large  portion  of  condensed  milk makers' raw material costs (~45%  of  condensed  milk  is  sugar),  can  be  sourced  from neighbouring Thailand at a cheaper price, albeit with some compromise on quality. 

Maintain  NEUTRAL.  We  are  cutting  our  FY12  and  FY13  earnings  forecasts  by  7.7% and  7.2%  respectively  as  we  trim  our  domestic  volume  expectations  and  increase  our LTC cost assumption to USD0.26 per lb from USD0.255 per lb previously.  Accordingly, this lowers our FV for MSM to RM4.50, based on a 13.0x FY13 PER. The stock's FY12 and FY13 dividend yields are unexciting at 3.3% and 3.4% respectively.

Source: OSK