KEY INVESTMENT HIGHLIGHTS

• 1QFY20 results posted a narrower loss of –RM29.4m as compared to preceding quarter loss of –RM39.6m, which was still below our and consensus expectation

• The losses was mainly attributable to higher depreciation, higher finance cost as well as increase in operation cost stemming from MSM Johor

• Ongoing cost rationalisation plan, product diversification to penetrate export markets, and a higher ASP of refined sugar are expecting to help weather the storm in FY20

• Maintain NEUTRAL with a revised TP of RM0.74

Narrower loss. MSM Malaysia Holdings Berhad’s (MSM) 1QFY20 normalised loss narrowed to –RM29.4m after excluding a one-off rationalisation cost of RM5.4m, from a loss of –RM39.6m in 4QFY19. Nonetheless, this still came in below ours and consensus expectations. Meanwhile on a year-over-year basis, the group’s 1QFY20 normalised losses widened by >100%yoy as compared to -RM5.0m in 1QFY19 which was mainly attributable to higher depreciation charge (RM8.6m), higher finance cost (RM7.5m), and increase in operational cost in MSM Johor (RM7.5m) due to lower plant utilisation rate in 1QFY20. However, this was partially offset by the lower average raw sugar cost (-8.5%yoy) and a reduction of total raw sugar purchased (-30.0%yoy).

Expecting healthy ASP and sales volume. The group’s 1QFY20 revenue increased by +5.4%yoy to RM509.0m, primarily as a result of higher average selling price (ASP) of refined sugars and sales volume (refer to Table 1). The ASP of refined sugars advanced by +3.9%yoy to RM2,105 per metric tonnes (mt), led by the wholesale (+7.6%yoy) and export segment (+3.9%yoy). The total sales volume also expanded by +5.4%yoy to 236k mt, stemming from the industries (+52.9%yoy) and export segments (+37.5%yoy) which helped to mitigate the lower volume from the wholesale segment. Note that the group intends to maintain its increased ASP for refined sugar which, in our view, could help in improving its margin going forward. While this could mean potential business loss from the wholesale segment, we believe that the increased business in industries and export market indicate the resiliency in the demand for MSM’s sugar products.

MSM Johor could potentially breakeven. We opine that the closure of MSM Perlis and relocation of factory operations to MSM Johor would lead to an improvement in refining cost and thus generate higher profit margins for the group. Coupled with increasing export queries for its sugar products, we are of the view that the Johor’s plant UR to improve to 40-50% in FY20. Note that the current UR of MSM Johor is 34% and it has a breakeven point at about 48%. Based on our channel checks, the group plans to utilise MSM Johor to cater for the potential sales up to about 300k mt for the export segment.

Source: MIDF Research - 28 May 2020