MSM Malaysia – The Case for a Strong 1Q21 Surprise (Part 2)

Previously, I have provided a qualitative assessment on why MSM has a good chance of providing a surprise 1Q21 results. You can read Part 1 here. In this Part 2, I will demonstrate in a reasonable, justifiable, and objective term, why MSM’s could return a strong set of 1Q21 numbers.

I have previously said MSM’s business model is simple and easy to understand, and in order to analyse MSM’s business, there are 3 main components to assess:

1. Average Selling Price for: (i) Domestic; (ii) Industry; (iii) Export
2. Selling volume for: (i) Domestic; (ii) Industry; (iii) Export
3. Operating Cost: (i) Raw Material Cost; (ii) Refining Cost

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1. Average Selling Price for 1Q21

This component is easy to project, as most figures are publicly available.

• Domestic: Sugar price is a controlled item in Malaysia, with a retail ceiling price of RM2,850/tonne. In this aspect, MSM has very little room to manoeuvre (that is why they hedged their raw sugar cost only for Domestic!), therefore it is safe to assume that ASP for domestic will remain the same as 3Q20 and 4Q20, which is RM2,506/tonne.
• Industry: MSM has raised industry ASP by RM50-RM150/tonne for 2021. We will be conservative and take just a RM75/tonne increase from 4Q20, which gives us RM2,234/tonne.
• Export: Affin Hwang and CIMB both reports that MSM has secured a price premium of USD140-150/tonne for export market. Applying this to the raw sugar price so far in the first 3 months, it gives us RM1,973/tonne. However, lets just be conservative and assume that MSM manage to raise only by 10% from 4Q20, tracking global white sugar prices, this gives us RM1,849/tonne.

2. Selling Volume for 1Q21

This component is a little more difficult to project, but we can do so with references to past volumes and reasonable inferences. We also have to contend with 3 weeks of “MCO” this quarter. Pay attention to the Export segment.

• Domestic: 79,000 tonnes registered in 4Q20. During 3Q20, when Malaysia was just recovering from a full lockdown, it sold 73,000 tonnes. So we will conservatively assume for 1Q21, domestic sales will be same as 3Q20, since conditions are similar: 73,000 tonnes
• Industry: 126,000 tonnes registered in 4Q20. Although industry is by no way affected by the MCO, we take a conservative approach in assuming 1Q21 figures will be 6,000 tonnes lower than 4Q20: 120,000 tonnes
• Export:  88,000 tonnes registered in 4Q20. Interestingly, MSM has locked in 220,000 tonnes of export sales out of the 350,000 tonnes target for 2021. However, we will be on the safe side and assume that 1Q21 will remain flat: 88,000 tonnes.

3. Operating Cost

The calculation methodology for this component is the most complex and difficult, but for the purpose of the audience, I will attempt to simplify it without jeopardising accuracy. For 4Q20, the operating cost was RM1,840/tonne. For 1Q21, there are several factors that will result in lower operating cost for MSM, namely:

• Gas Price: gas price has reduced 35% vs 4Q20 (translating to RM50/tonne in refining cost reduction)
• USD/RM Hedge: 1Q21 hedging at RM4.06 vs RM4.14 during 4Q20 (stronger ringgit results in lower raw material cost)
• Domestic Raw Sugar Hedge: 85% of volume required hedged at US$0.13-0.14/lbs (20% savings from market rate)
• Utilisation Factor and Yield: 3%-5%Improvement from 4Q20

With all of the above factors reducing 1Q21 Operating Cost, let’s still be conservative and assume for our calculation that operating cost will just remain constant as 4Q20: RM1,840/tonne. This is ok because raw sugar cost has actually increased 10% from 4Q20 as well. The benefit and cost balance each other out. 

Conclusion

With all assumptions and numbers given as above, projection for MSM are as follow:

• Revenue: RM 614 million
• Operating Cost: RM517 million
• EBITDA: RM97 million
• Margin: 15.8%

Key Upside from this calculation that are not impossible:

1. Export volume tops 100,000 tonnes (65% of 350,000 tonnes target secured for 1H21)
2. Lower refining cost with 35% decrease in gas price
3. Lower refining cost with increased yield from 90% to 92% and utilisation factor from 27% to 30%
4. Higher Industry ASP

Key Downside:

1. Domestic and Industry volume declines more than expected due to "MCO"
2. Higher freight cost for import
3. Other unforeseen circumstances            

Given all that we know now, what are the chances for MSM in 1Q21? Your call to make.