KEY INVESTMENT HIGHLIGHTS

• 9MFY19 normalised losses plunged to –RM122.1m as compared to profit of RM46.0 in 9MFY18

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

• Johor refinery continues to burden the group in view of tapering utilization rate

• We are revising our earnings forecast downward

• Maintain SELL with an revised TP of RM0.70

Earnings plunged further. MSM Malaysia Holdings Berhad’s (MSM) 9MFY19 core losses plunged to –RM122.1m, as compared to profit of RM46.0m in prior year. The higher-than-expected losses was mainly attributable to the continued deteriorating refined sugar’s ASP amidst the sugar glut as well as higher finance and refining cost mainly from the operation of Johor refinery.

Continued contraction in the ASP and sales volume. The group’s 9MFY19 revenue dropped further by -8.0%yoy to RM1,482.0m primarily as a result of lower ASP of refined sugars (Table 1). The 9MFY19’s ASP of refined sugars has fell by -6.6%yoy to RM1,980 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 marginally by - 1.1%yoy to 698m mt. This was primarily due to the liberalisation of the sugar industry (i.e. issuance of 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 MSM’s ASP of refined sugars and volume will continue to decline in this current tough operating environment.

Johor refinery at lower utilisation rate. On top of the poor ASP of refined sugars, the operating loss was continued to be augmented by higher finance and refining cost arising mainly from its Johor refinery plant. Note that 1H19’s finance cost rosed by +303.6%yoy to –RM65.5m due to the increased borrowings. In addition, the reduced utilisation rate of the Johor refinery at below 20% contributed to higher refining cost which further weighs on the margin. In addition, its Perlis refinery is running at lower utilisation rate of 60-65% as well. Moving forward, we expect the utilisation rate to remain low in view of the competitive sugar market and continued oversupply of refined sugars in the domestic market.

Earnings revised downward. We are reducing further our FY19 and FY20 core losses to -RM160.0m and –RM133.0m 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 RM0.70 (previously RM0.88). Our valuation is based on forecasted FY20 book value per share of RM1.41 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. Disposal of non-core assets also seem to be limited as well at this juncture. All in, we are maintaining our SELL recommendation on the stock.

Source: MIDF Research - 21 Nov 2019