KEY INVESTMENT HIGHLIGHTS

• Global deficit of sugar to lead to upward movement in raw sugar price

• Favourable sugar market conditions are expected to increase MSM’s ASP of refined sugars and sales volume

• Main areas of focus in FY20 will include prudent cost management, expanding its product lines, and increase the utilization rate of its Johor refinery

• We are revising upwards our earnings forecast for FY20 and FY21 in view of the expected improving fundamentals

• Upgrade to NEUTRAL with a revised TP of RM0.81

Global sugar deficit. The current global sugar market is expected to be facing its largest supply shortage in five years of about -8.2m mt in view of the anticipated production cuts in major sugar-producing countries such as India, Thailand and Central-South (CS) Brazil, EU and China in year 2020. The decline in sugar production is mainly brought about by a combination of poor weather and lower planted area. According to the U.S. Department of Agriculture (USDA), the global stocks are also projected to be trimmed by 5m mt to 50m mt with lower stocks in China, India and Pakistan. India, the world’s largest sugar producer, is estimated to decline -6.6m mt to 26.5m mt, due to lower area and yields which caused by the unfavourable dry weather. However, the recent improving rainfall in Maharashtra could be partially helping the production from India to recover gradually. Meanwhile, the increasing diversion of total sugarcane output to be used for ethanol production (c.65%) and less to sugar (c.35% vs c.39% in previous crop) in CS-Brazil is reducing the sugar production in the second-largest sugar producing country. In addition, Thailand being the fourth-largest sugar producing country is also forecasted to lower its output by -3.7m mt to 10.9m mt on lower sugarcane yields and sugar extraction rates due to shortfall of rain. Thus, we view that this landscape presents an opportunity for MSM increase its export market.

Source: MIDF Research - 5 Feb 2020