INVESTMENT HIGHLIGHTS

• 1HFY19 normalised losses deepened to –RM74.0m as compared to profit of RM32.3m in 1HFY18

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

• Johor refinery adds further burden to the group

• Maintain SELL with a revised TP of RM0.88

Earnings to stay in negative territory. MSM Malaysia Holdings Berhad’s (MSM) 1H19 core losses plunged to –RM74.0m, as compared to profit of RM32.3m in prior year. The larger-than-expected negative earnings results was predominantly due to the continued deteriorating refined sugar’s ASP amidst worsening price war as well as higher finance and refining cost mainly from the operation of Johor refinery.

Declining ASP and sales volume. The group’s 1H19 revenue dropped by -14.5%yoy to RM959.5m primarily as a result of lower ASP of refined sugars (Table 1). The 1H19’s ASP of refined sugars has fell by -9.3%yoy to RM1,994 per metric tonnes (mt), a new record low in two years. Note that the group’s ASP has been on the decline since 1Q17 when the ASP was still hovering around RM2,600 level. The total sales volume has also waned by -3.3%yoy to 446m mt. This was mainly attributable to the liberalisation of the sugar industry (i.e. increase in approved permits) which gave rise to an oversupply of cheaper foreign refined sugars in the domestic market. Moving forward, we are of the view that its ASP of refined sugars and volume will continue to face uphill battle to see signs of recovery in the foreseeable future.

Operating loss to persist. On top of the poor ASP of refined sugars, the operating loss was further exacerbated by higher finance and refining cost arising mainly from its Johor refinery plant. Note that 1H19’s finance cost has rosed by +287.0%yoy to -RM48.4m as a result of modification of certain terms in respect of the Islamic term loan which was an accounting impact. Management guided that the finance costs was expected to normalise in coming quarters to around RM20.0m level. In addition, the low utilisation rate of the Johor refinery between 20% and 30% contributed to higher refining cost which further weigh on the margin. We expect the utilisation rate to remain low in view of the competititve sugar market.

Earnings revised downward. We are reducing further our FY19 and FY20 core losses to -RM140.0m and –RM120.0m respectively in view of the current heightened domestic sugar price war and dwindling sales demand as well as higher refining and finance cost.

Target Price. Subsequent to our earnings adjustment, we are deriving a new target price of RM0.88 (previously RM1.07). Our valuation is based on forecasted FY20 book value per share of RM1.76 to its two-year historical price-tobook ratio of 0.5x.

Maintain SELL. The outlook of the group’s fundamentals remain bleak as it continues to be suffered from lower average selling price of its refined sugars and higher operating costs. This negative repercussion from the liberalisation of the sugar industry by the Malaysian government also have been reverberating across MSM’s domestic market where it derives approximately 90% of its revenue. Moving forward, we opine that the prolonged oversupply of cheaper foreign refined sugar in the domestic market would continue to present a precarious situation for MSM. In addition, we view that the Johor refinery will continue to negatively impact the group’s wellbeing as it contributes to higher refining and finance costs. Albeit the management has been actively seeking strategic partnerships on the export market and downstream segment, we posit that the turnaround efforts might require an extended period to materialise amidst the current protracted and unfavourable operating environment. All in, we are maintaining our SELL recommendation on the stock.

Source: MIDF Research - 22 Aug 2019