INVESTMENT HIGHLIGHTS

• Wholesale and retail sugar price hike

• The price hike does not impact the industries segment

• The sugar price hike is below expectation

• Revenue from increase in retail price will be mitigated by expected decreased in sugar consumption

• Maintain SELL with a revised TP of RM3.22 per share

Wholesale and retail sugar price hike. The Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC) issued a federal gazette on the enforcement of the Price Control and Anti-Profiteering (Determination of Maximum Price) (No.2) Order 2017. The federal gazette dictates that the ceiling price of refined sugar will increase by as much as 11sen/kg effective from 1st March 2017. Currently, the

wholesale and retail ceiling price of coarse grain white refined sugar for the states in Peninsular Malaysia for instance, is RM2.87/kg (previously RM2.76/kg) and RM2.95/kg (previously RM2.84/kg) respectively.

The price hike does not impact the industries segment. There will be no impact expected from the hike in the retail sugar price to the industries segment i.e. F&B players. The price of refined sugar to industries segment i.e. F&B players has risen to RM2,700/mt at the end of FY16. Hence, its impact had already been priced into our valuation for the F&B players within our coverage. Hence, we maintain our NEUTRAL call with unchanged TP for Nestle (TP: RM81.56) and F&N (TP: RM22.52).

The sugar price hike is below expectation. The increase represents approximately +4% hike in the price of refined sugar. MSM had previously been in negotiations with the government for a 20%- 30% retail price increase for refined sugar from the current RM2.84/kg. Hence, the +4% increase to RM2.95/kg is far below its expectations. In addition, the recent increase in price of refined sugar to the industries segment has contributed to the drop in sales volume for this segment of about -14%.

Revenue from retail price increase will be mitigated by expected decreased in sugar consumption. We expect that the revenue derived from retail price increase will be mitigated by the expected decrease in sugar consumption and hence, sales volume is expected to drop. Also, the price increase only affects the domestic segment which only accounts for 53% of total revenue in FY16.

Impact to earnings. Taking into account the +4% hike in ceiling prices, we estimate a +2.1% increase in FY17 earnings.

Maintain SELL with a revised TP of RM3.22. We maintain our SELL recommendation on MSM with a revised TP of RM3.22 (previously RM3.15). Our target price is based on PER17 and EPS17 of 16.8x and 19.16sen respectively. Our target PER is premised on the average PER of the company for the past five-years.

Source: MIDF Research - 3 Mar 2017