What’s New

• Increased wholesale/retail ceiling prices for refined sugar by 7%/3%

• Increase forward earnings by 40-76%

• Upgrade to HOLD with higher TP of RM4.70

Sugar rush

Upgrade to HOLD with higher TP of RM4.70. We upgrade our call for MSM to HOLD and raise our TP to RM4.70 upon revising upwards our 17F/18F earnings to reflect the increased average selling price announced by the authorities recently.

Sugar price hike. The authorities have announced that with effect from 1 March, the maximum wholesale price and retail price for coarse grain white refined sugar would be raised to RM2.87/kg (+7%) and RM2.95/kg (+3.8%), respectively. We are not entirely surprised by such a move as it has been highlighted as one of the key upside risks to our previous recommendation.

Bidding to be a regional player. MSM is building a new sugar refinery at Port Tanjung Pelepas (PTP), Johor, capable of producing 1.1m MT refined sugar p.a. The refinery is targeted to be completed in FY18, and will reportedly have 30-35% lower processing cost upon full capacity operation. But the refinery’s margins will be lower than its existing operations, as it is intended to serve the competitive export market.

Opening of Dubai trading platform. MSM registered commodity gains of RM38m in YTD FY16 owing to the opening of its Dubai trading operations. The new trading platform will fully take over the role of purchasing raw sugar, which was previously done by MSM’s refinery. This move allows MSM to improve the management of its cost (which can be volatile), in light of the fact that the trading platform provides better access to the global raw sugar market.

Valuation

We upgrade our rating to HOLD with a higher TP of RM4.70 (RM3.00 previously), still pegged to a forward PE of 17x (5- year mean), following our earnings revision.

Key Risks to Our View

Weaker ringgit against USD. Raw sugar costs, which make up c.82% of the group’s opex, are transacted in USD. If the ringgit continues to weaken against the USD, this could put pressure on the group’s bottomline.

Source: Alliance Research - 3 Mar 2017