INVESTMENT HIGHLIGHTS

• Expect earnings to turnaround in FY18

• Smuggled Thai sugar may continue to affect sales volume in 2QFY18

• Cost of sales likely to drop at a faster pace than revenue decline due to fall in sugar price

• Maintain NEUTRAL with TP of RM3.86

Expect earnings to turnaround in FY18. We recently met up with MSM Malaysia Holdings Berhad (MSM) management and returned feeling reassured on the Company’s long term prospect due to stable demand for its product. Overall, we expect MSM earnings to turnaround in FY18 with Profit After Tax estimated at RM97.1m (against FY17 Loss After Tax of RM32.6m). Key driver will be the significant decline in cost due to lower raw sugar price. Recall that MSM has registered three consecutive profitable quarters in 3QFY17, 4QFY17 and 1QFY18 and we expect this trend to persist throughout FY18.

Smuggled Thai sugar may continue to affect sales volume in 2QFY18. Recall that 1QFY18 revenue was down by 15%yoy to RM549m as sales volume declined by 7%yoy to 222,679 tonnes. We gather that MSM is facing intense competition due to cheaper smuggled refined sugar from Thailand. In our view, things should only start to recover in 2HFY18 as it takes time for the market to clear the stocks.

Cost of sales likely to drop at a faster pace than revenue decline due to fall in sugar price. Year-to-date (YTD), average Sugar No. 11 price (benchmark for raw sugar price) is at USD 12.71 cents and this is 20% lower than FY2017 average of USD 15.80 cents. The significant decline in sugar price is caused by near-record global production as both India and Thailand registered record production. As a result, we believe that MSM cost of production should drop at a faster rate than revenue decline. In FY17, 88% of MSM's production cost is derived from raw sugar.

Maintain NEUTRAL with TP of RM3.86. We have reduced our revenue and cost estimates for both FY18 and FY19, resulting in unchanged earnings forecasts. Our Target Price is based on 21x Forward PE on FY19 EPS of 18.37 sen. The 21x Forward PE is based on +1.0SD Valuation as we expect earnings to turnaround in FY18. Despite the earnings turnaround, the issue of smuggled Thai sugar may limit MSM near term share price upside.

Source: MIDF Research - 21 Jun 2018