INVESTMENT HIGHLIGHTS

• FY17 earnings impacted by higher raw sugar cost and reduction in sales volume

• Raw sugar cost anticipated to be lower in FY18

• Nonetheless, limited growth seen for FY18 sales volume

• Maintain NEUTRAL with unchanged TP of RM4.09

Weaker FY17 financial performance. To recall, MSM Malaysia Holdings Bhd’s (MSM) 4QFY17 reported earnings dropped by -9.1%yoy to RM13.1m. This contributed to the loss of -RM32.6m recorded for full year FY17. The poor performance in FY17 were mainly impacted by: (i) the -3.3%yoy decline in annual domestic sales volume and; (ii) the increase in annual average raw sugar cost by more than +20.0%yoy to RM2,100 per MT.

Expecting raw sugar costs to reduce in FY18. For FY17, MSM’s raw sugar costs was affected on two fronts i.e. (i) increase of average cost of raw sugar to 19.0cents per pound from 17.0cents per pound in FY16 and; (ii) weakening of Ringgit to an average of RM4.30/USD from the RM4.10/USD recorded in FY16. For FY18, management guided that it has has hedged approximately 50% of its total budgeted requirement at below 16.0cents per pound as the international raw sugar price has declined. Coupled with the expectation of a stronger Ringgit, we expect the profit margin to improve in FY18.

FY18 sales volume to grow at modest pace. The overall sales volume for FY17 dropped -3.0%yoy to 997k MT. This is due to the decline in sales volume for domestic segment of -3.3%yoy to 475k MT. The decline is caused by: (i) approved permits (AP) awarded to some industry players to import 15k MT of refined sugar in FY17 and; (ii) smuggled refined sugar to domestic market from Thailand. We expect a modest recovery in sales volume for FY18, premised on: i) expectation of no new AP being awarded and; (ii) commencement of the new refinery plant in Johor in June 2018 which is expected to produce 387k MT in the first six months of operation.

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. At this juncture,

we believe that the upside for the stock is limited as we view that the expectation of better earnings prospect in FY18 have mostly been priced into the current valuation.

Source: MIDF Research - 23 Feb 2018