INVESTMENT HIGHLIGHTS

• 2QFY17 recorded a net loss of RM21.5m

• Revenue growth driven by higher selling prices

• Gross profit margin contracted

• Upgrade to NEUTRAL with a revised TP of RM3.31 based on a EPS18 and PER18 of 19.5sen and 17.0x respectively

Lagged our and concensus expectations. MSM’s 2QFY17 recorded a net loss of RM21.5m from the RM23.7m earnings reported in the corresponding quarter last year. This lagged our and consensus expectation as we expected that the company will turn profitable in the 2QFY17 due to the recent decline of raw sugar price.

Revenue growth driven by higher selling prices. MSM’s 2QFY17 revenue grew by +17.3% to RM649.0m on the back of higher selling prices. The revenue for domestic, industries and export segments grew +2.8yoy, +25.5%yoy and +31.6%yoy respectively. Nevertheless, the total sales volume for the quarter dropped to 257k MT (a decline of - 4.8%yoy) as all three segments’ sales volume dropped at -4.8%yoy, - 3.7%yoy and -7.9%yoy respectively. Consequently, the total sales volume for 1HFY17 dropped at -2.2yoy to 496k MT.

Gross profit margin contracted. The cost of sales for 2QFY17 rose by +22.7%yoy to RM672.2m mainly due to the higher raw material costs purchased which peaked at 20.54cents/pound and weakening Ringgit. Due to this, the average raw sugar cost for the group increased by+54.0%yoy which brought about the shrunk in GP margin by - 10.6ppts yoy to 2.9%. For the record, the cost of raw sugar for the group was approximately RM2,350/MT in the 1HFY17 compared to RM1,575/MT for the 1HFY16. Nevertheless, the dropped in selling and distribution cost as well as administrative expenses by -24.8% and - 57.9% mitigated the quantum of loss recorded in this quarter.

Prospects. The international raw sugar prices is currently on a declining trend at 14.0cents/pound price level (-30% dropped from the peaked of 20.54cents/pound). However, management guided that the price of raw sugar is locked at a slighly higher price than the current market level for the most part of 2HFY17. Coupled with the dropped in sales volume, we do not expect that there will be a significant recovery in the 2HFY17

Impact to earnings. We revise our FY17 and FY18 earnings downwards by -86% and -4.5% as we believe that FY17 will remain challenging year for the group and the turnaround of the performance is expected to be seen in FY18 as GP margin improved due to lower raw sugar price coupled with a stronger Ringgit.

Upgrade to NEUTRAL with a revised TP of RM3.31. We upgrade our call to NEUTRAL stance (previously SELL and revised our target price downward to RM3.31 (previously RM3.46 per share). Our target price is based on PER18 and EPS18 of 17.0x and 19.5sen respectively. Our target PER is premised on the average PER of the company for the past one-year.

Source: MIDF Research - 30 Aug 2017