INVESTMENT HIGHLIGHTS

• 4QFY16 revenue grew by +26.3%yoy to RM838.8m driven by domestic segment

• Sales for industries segment increased due to price hike whilst export segment dropped

• Shrinking GP margin and OP margin due to higher costs

• Downgrade to SELL with a revised TP of RM3.15 based on a PER17 of 16.8x

Lagged our expectations. MSM’s 4QFY16 earnings dropped - 76.5%yoy to RM14.4m, whilst full year FY16 earnings dropped by - 56.1%yoy to RM120.7m. The full year FY16 earnings accounted for 82% and 86% of our and consensus full year forecasts respectively.

Revenue grew by +26.3%yoy in 4QFY16 driven by domestic segment. MSM’s 4QFY16 revenue grew by +26.3% to RM838.3m on the back of improved sales and higher volume of refined sugar sold for domestic market segment of RM379m (+36%yoy) and 143k MT (+25%yoy) respectively. The company sold more to domestic consumers at 54% of total sales compared to 44% in 4QFY15.

Sales for industries segment increased due to price hike whilst export segment dropped. The industries segment recorded a higher sales of RM272m (+11%yoy) in 4QFY16. However, volume dropped to 101k MT (-14%yoy) possibly due to the recent price hike of approximately +10% effective 1st Nov which has decreased consumption. Export segment meanwhile experienced a drop in sales and volume of RM52m (-54%) and 26k MT (-33%) respectively.

Shrinking GP margin and OP margin due to higher cost. In 4QFY16, the GP margin contracted by -10.3ppts yoy to 7.7% which is due to the higher raw sugar price and weakening Ringgit. As reiterated by management, the raw sugar price increased by +27%yoy whilst Ringgit depreciated more than -10%yoy. Due to these and the increased in sales and distribution cost of +39%yoy, OP margin shrunk by -10.8ppts to 3%.

Prospects. 2017 will remain as a challenging year for MSM due to its inability to pass on the spike in raw sugar price to buyers and this will continue to depress its profit margins. As of current, the company is still in talks with the government on further price hike but the outcome remains unclear.

Impact to earnings. We revise our FY17 earnings downwards by -34.2% guided by the severe contraction in margin due to higher raw material cost as well as increasing operating expenses.

Valuation. At current prices, MSM is trading at almost peak valuation of PER 27x. We believe that the current market price is unsustainable moving forward as the company’s earnings will not be able to post figures in excess of RM200m in the mid term.

Downgrade to SELL with a revised TP of RM3.15. Due to the bleak outlook for 2017 and lofty valuations, we downgrade MSM to SELL with a revised target price of RM3.15 (previously RM4.02 per share). Our target price is based on PER17 and EPS17 of 16.8x and 18.75sen respectively. Our target PER is premised on the average PER of the company for the past five-years.

Source: MIDF Research - 23 Feb 2017