INVESTMENT HIGHLIGHTS

• 1QFY19 normalised earnings remained in negative territory of –RM7.4m as compared to profit of RM20.7m in 1QFY18

• This was mainly attributable to lower average selling price (ASP) of refined sugar and higher refining cost

• Earnings revised downward for FY19 and FY20 in view of heightened competition from various fronts

• Downgrading to SELL with a revised TP of RM1.19

Earnings still in red. MSM Malaysia Holdings Berhad’s (MSM) 1QFY19 core earnings took a deep dive to –RM7.4m, as compared to RM20.7m in prior year. The negative earnings results was predominantly attributable to the continued weaker refined sugar average selling price (-12.0%yoy), higher refining cost (+11.7%yoy) and higher depreciation cost (+96.0%yoy) from its Johor sugar refinery factory which commenced operation in April 2019.

Intensified pricing pressure. On a year-on-year basis, 1QFY19’s ASP of refined sugar of the domestic, industries and export markets continued to be on downtrend, decreasing by -12.0%yoy, -14.7%yoy and -5.4%yoy to RM2,314/mt, RM2,023/mt and RM1,750/mt respectively. Consequently, the marginal increase in volume by +0.9%yoy to 224.0k metric tonnes weren’t enough to cover the shortfall in revenue which fell at a faster pace of -11.0%yoy to RM484.0m. We view that the domestic price war and lower exports and industries demand was due to: (i) cheaper refined Thai and India white sugar as substitutes, (ii) temporary approved permits (AP) to import refined sugar were awarded and, (iii) oversupply of sugar globally had weigh on price. MSM has been pressured to lower its refined sugar price to be on par with competing new refined sugar brands in order to maintain and gain market share, even if it means operating at a loss position.

Profit margin deteriorated. MSM’s 1QFY19 gross profit margin have contracted by -11.0%yoy 5.0%, premised on the drop in revenue of - 11.6%yoy, outpacing the contraction in cost of sales of -6.8%yoy. This was mainly due to the continued falling prices of refined sugar (- 12.0%yoy) amid oversupply conditions and intense competitions, coupled with weaker ringgit against USD making the cost of production considerably higher. In addition, due the recent commencement of Johor refinery operation, the refining cost has increased to RM362/mt (+11.7%yoy).

Source: MIDF Research - 24 May 2019