INVESTMENT HIGHLIGHTS

• FY17 earnings impacted by higher raw material cost

• Lower revenue growth from the domestic segment while the industries and export segments posted double digit growth

• Profit margin expected to stage a recovery in FY18

• Maintain NEUTRAL with unchanged TP of RM4.09

Earnings lagged expectations. MSM Malaysia Holdings Bhd’s (MSM) 4QFY17 reported earnings dropped by -9.1%yoy to RM13.1m. For fullyear FY17, the group recorded a loss of -RM32.6m from an earnings of RM120.7m reported in FY16 mainly due to higher raw material cost. This is the group first loss making year since its IPO in 2011. This reported result lagged ours and consensus estimates.

Revenue grew marginally driven by higher selling prices. MSM’s FY17 revenue grew marginally by +0.3%yoy to RM2,666.1m, mainly supported by higher selling prices of refined sugar. Note that the total average selling prices (ASP) increased by +1.2%yoy to RM2,600 per MT. However, the increase in ASP was partially mitigated by the drop in sales volume to 997k MT (-3.0%yoy). Segment wise, revenue from the industries and export segments grew strongly by +11.8%yoy and +20.0%yoy respectively. Meanwhile, the domestic segment posted lower revenue growth of +3.0%yoy due to the -3.3%yoy drop in sales volume.

Operating profit margin contraction and income tax expenses lead to a loss. The international raw sugar price has declined from approximately USD0.20 per pound beginning of 2017 to USD0.14 per pound currently (a decline of -30%yoy). In comparison, the average cost of raw sugar for MSM has dropped by a lower quantum due to the higher carry forward balance of cost raw sugar inventory from FY16. Consequently, gross profit margin FY17 decline to 5.6% from 12.4% as at FY16. During the year, there is an increase in deferred tax liabilities which lead to recognition of additional income tax expense. This compounded the loss recorded in FY17 to –RM32.6m.

Impact to earnings. We maintained our earnings estimates at this juncture pending analyst briefing.

Prospects. The FY17’s recovery in earnings is slower than expected due to: (i) the continuous decline in the sales volume of domestic segment since the hike in the retail sugar price and; (ii) higher remaining balance of high-cost raw sugar inventory. Moving forward, we expect that MSM’s earnings will recover in FY18 due to the: (i) recovery in sales volume to domestic and industries segment as the government’s measures to curb with the rising prices of basic necessities such as KRIM 2.0 take into effect; and (ii) better margins following the recent downtrend in international raw sugar price and stronger Ringgit. However, while the opening of new refinery plant in Johor in the 2HFY18 is expected to boost export volume, we opine that the export revenue growth will taper down due to the strengthening Ringgit.

Maintain NEUTRAL. We maintain our NEUTRAL stance with an unchanged target price of RM4.09. Our target price is premised on EPS18 and PER18 of 19.5sen and 21.0x respectively.

Source: MIDF Research - 22 Feb 2018