KEY INVESTMENT HIGHLIGHTS

• MSM is disposing its non-core agricultural lands for a total consideration of RM156.0m

• The disposal is part of MSM’s non-core asset rationalisation exercise in view of current tough operating landscape

• The proceeds would be apportioned to pare down debt and use for its working capital purposes

• Minimal impact to balance sheet and earnings

• Maintain SELL with an unchanged TP of RM0.88

Disposal of non-core assets. MSM Malaysia Holdings Berhad (MSM) is disposing its nine parcels of leasehold agricultural lands (“the lands”) to Fraser & Neave Holdings Berhad (F&N) (Neutral, TP:RM33.78) for a total cash consideration of RM156.0m. The lands are all located within Mukim of Chuping, District and State of Perlis and has a combined land size of 4,453.9ha. The lands are principally used for the cultivation of rubber, palm oil and mango plantation. It is worth noting that the lands represent all of the plantation lands owned by MSM Perlis Sdn Bhd, a wholly-owned subsidiary of MSM and that it constitutes 6 of MSM’s top 10 properties. The proposed disposal in expected to be completed by the second quarter of CY20.

Consideration. The purchase price of RM156.0m for the lands represents a discount of -18.0% and -1.1% of the market value of RM190.0m and net book value (NBV) of RM157.7m respectively. Meanwhile, MSM has also invested a total amount of approximately RM171.0m on the lands. If computed based on NBV, the expected loss would be about RM1.7m excluding expenses related to the disposal. The lower price is mainly premised on the short leasehold term of the lands and high operating costs in running the plantation areas.

View. We do not view this news as a surprise given that both MSM and its parent company, FGV Holdings Berhad (Neutral, TP:RM0.96), have mentioned that it would embark on its non-core asset monetisation plan and focus on its core businesses in view of the tough operating environment in the sugar refinery and palm oil industry. The proceeds will be expected to be used for partially paring the group’s high debt level and working capital purposes. Nonetheless, we opine the disposal is insufficient to lift MSM from its precarious position in the domestic sugar refinery business landscape.

Impact. Assuming all the proceeds be utilised to reduce the borrowing of RM1.2b as at 2QFY19, MSM’s gearing ratio would improve to 55.6%. from 66.7% as at 2QFY19. Thus, we view that the disposal would have minimal positive impact on the borrowings and, consequently, the finance cost. Note that the finance cost grew by +287.0% to -RM48.4m as of 1HFY19. Moreover, subsequent to this disposal, we view that the group would not have much non-core asset to dispose off.

Making reference to the FY18 annual report, we observed that the group’s remaining non-core assets will only consist of four vacant lands with a combined net book value of RM9.8m as at 31st December 2018. In addition, should the group decide to reduce its production operations, we opine that the Johor refinery will be likely be the first to be divested as we view that the utilisation rate remains low at below 30%.

Target Price. We are maintaining our target price of RM0.88. This is premised on forecasted FY20 book value per share of RM1.76 to its two-year historical price-to-book ratio of 0.5x.

Maintain SELL. We are of the view that the group to remain in a loss-making position given the current sustained unfavourable lower average selling price of its refined sugars and higher operating costs. While the proceeds could improve the cash position slightly, it is still far from partially offsetting the higher borrowing cost resulting in higher finance cost incurring to the group. In addition, we postulate that the group is now left with not much of high value non-core assets to be monetised further. This is premised on that the lands disposal has already made up 6 of the MSM’s top 10 properties and the rest are mainly for the use of its core businesses. All factors considered; we are maintaining our SELL recommendation on MSM with an unchanged target price of RM0.88. Nonetheless, a key re-rating catalyst would be the potential onboarding of strategic equity partner for MSM to improve its key business areas such as utilisation rate of its sugar refineries, export and domestic demand of its refined sugars as well as the potential sale of its Johor refinery.

Source: MIDF Research - 9 Oct 2019